Are Strong Financial Prospects The Force That Is Driving The Momentum In RichWave Technology Corporation's TPE:4968) Stock?

Most readers would already be aware that RichWave Technology's (TPE:4968) stock increased significantly by 96% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to RichWave 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for RichWave 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 RichWave Technology is:

31% = NT$582m ÷ NT$1.9b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each NT$1 of shareholders' capital it has, the company made NT$0.31 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of RichWave Technology's Earnings Growth And 31% ROE

First thing first, we like that RichWave Technology has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 11% also doesn't go unnoticed by us. As a result, RichWave Technology's exceptional 23% net income growth seen over the past five years, doesn't come as a surprise.

Next, on comparing with the industry net income growth, we found that RichWave Technology's growth is quite high when compared to the industry average growth of 8.7% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is RichWave Technology fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is RichWave Technology Making Efficient Use Of Its Profits?

RichWave Technology's three-year median payout ratio is a pretty moderate 49%, meaning the company retains 51% of its income. By the looks of it, the dividend is well covered and RichWave Technology is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, RichWave Technology is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 32% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 50%, over the same period.

Conclusion

Overall, we are quite pleased with RichWave Technology's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard would have the 3 risks we have identified for RichWave Technology.

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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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