Stock Analysis

Topco Scientific Co.,Ltd.'s (TPE:5434) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

TWSE:5434
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Topco ScientificLtd (TPE:5434) has had a rough three months with its share price down 2.1%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Topco ScientificLtd's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Topco ScientificLtd

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Topco ScientificLtd is:

19% = NT$1.9b ÷ NT$9.9b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. One way to conceptualize this is that for each NT$1 of shareholders' capital it has, the company made NT$0.19 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. 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. 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.

A Side By Side comparison of Topco ScientificLtd's Earnings Growth And 19% ROE

To start with, Topco ScientificLtd's ROE looks acceptable. Especially when compared to the industry average of 11% the company's ROE looks pretty impressive. Probably as a result of this, Topco ScientificLtd was able to see a decent growth of 15% over the last five years.

As a next step, we compared Topco ScientificLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 8.7%.

past-earnings-growth
TSEC:5434 Past Earnings Growth February 16th 2021

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is 5434 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Topco ScientificLtd Efficiently Re-investing Its Profits?

While Topco ScientificLtd has a three-year median payout ratio of 66% (which means it retains 34% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Besides, Topco ScientificLtd has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 69%. Accordingly, forecasts suggest that Topco ScientificLtd's future ROE will be 19% which is again, similar to the current ROE.

Summary

On the whole, we feel that Topco ScientificLtd's performance has been quite good. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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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About TWSE:5434

Topco ScientificLtd

Provides precision materials, manufacturing equipment, and components for semiconductor, LCD, and LED industries in Taiwan, China, and internationally.

Outstanding track record and undervalued.