Has ASE Technology Holding Co., Ltd.'s (TPE:3711) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

ASE Technology Holding's (TPE:3711) stock is up by a considerable 27% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on ASE Technology Holding's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for ASE Technology Holding

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for ASE Technology Holding is:

12% = NT$25b ÷ NT$218b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every NT$1 worth of equity, the company was able to earn NT$0.12 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of ASE Technology Holding's Earnings Growth And 12% ROE

To start with, ASE Technology Holding's ROE looks acceptable. Further, the company's ROE is similar to the industry average of 11%. However, we are curious as to how ASE Technology Holding's decent returns still resulted in flat growth for ASE Technology Holding in the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

As a next step, we compared ASE Technology Holding's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 8.9% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is 3711 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is ASE Technology Holding Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 50% (meaning, the company retains only 50% of profits) for ASE Technology Holding suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Additionally, ASE Technology Holding started paying a dividend only recently. So it looks like the management must have perceived that shareholders favor dividends over earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 52% of its profits over the next three years. Accordingly, forecasts suggest that ASE Technology Holding's future ROE will be 13% which is again, similar to the current ROE.

Summary

Overall, we feel that ASE Technology Holding certainly does have some positive factors to consider. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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