Nuvoton Technology Corporation's (TPE:4919) Stock's Been Going Strong: Could Weak Financials Mean The Market Will Correct Its Share Price?

Nuvoton Technology (TPE:4919) has had a great run on the share market with its stock up by a significant 7.4% over the last month. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Particularly, we will be paying attention to Nuvoton Technology's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Nuvoton Technology

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 Nuvoton Technology is:

4.6% = NT$533m ÷ NT$12b (Based on the trailing twelve months to December 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$0.05 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Nuvoton Technology's Earnings Growth And 4.6% ROE

On the face of it, Nuvoton Technology's ROE is not much to talk about. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 11% either. As a result, Nuvoton Technology's flat net income growth over the past five years doesn't come as a surprise given its lower ROE.

We then compared Nuvoton Technology's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 8.9% in the same period, which is a bit concerning.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Nuvoton Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Nuvoton Technology Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 74% (implying that the company keeps only 26% of its income) of its business to reinvest into its business), most of Nuvoton Technology's profits are being paid to shareholders, which explains the absence of growth in earnings.

In addition, Nuvoton Technology has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

Overall, we would be extremely cautious before making any decision on Nuvoton Technology. As a result of its low ROE and lack of mich reinvestment into the business, the company has seen a disappointing earnings growth rate. Up till now, we've only made a short study of the company's growth data. You can do your own research on Nuvoton Technology and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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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