Does Fitipower Integrated Technology Inc.'s (TPE:4961) Weak Fundamentals Mean That The Market Could Correct Its Share Price?

Fitipower Integrated Technology (TPE:4961) has had a great run on the share market with its stock up by a significant 295% over the last three months. 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. In this article, we decided to focus on Fitipower Integrated Technology's ROE.

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 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 Fitipower Integrated Technology

How To 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 Fitipower Integrated Technology is:

6.3% = NT$282m ÷ NT$4.5b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. So, this means that for every NT$1 of its shareholder's investments, the company generates a profit of NT$0.06.

What Is The Relationship Between ROE And 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Fitipower Integrated Technology's Earnings Growth And 6.3% ROE

When you first look at it, Fitipower Integrated Technology's ROE doesn't look that attractive. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 11%. Hence, the flat earnings seen by Fitipower Integrated Technology over the past five years could probably be the result of it having a lower ROE.

Next, on comparing with the industry net income growth, we found that Fitipower Integrated Technology's reported growth was lower than the industry growth of 8.6% in the same period, which is not something we like to see.

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). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Fitipower Integrated Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Fitipower Integrated Technology Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 53% (meaning, the company retains only 47% of profits) for Fitipower Integrated Technology suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

In addition, Fitipower Integrated Technology has been paying dividends over a period of seven 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

On the whole, Fitipower Integrated Technology's performance is quite a big let-down. As a result of its low ROE and lack of mich reinvestment into the business, the company has seen a disappointing earnings growth rate. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Fitipower Integrated Technology's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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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