Is Sitronix Technology Corporation's (TPE:8016) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Most readers would already be aware that Sitronix Technology's (TPE:8016) stock increased significantly by 24% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Sitronix Technology's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Sitronix Technology

How To Calculate Return On Equity?

ROE can be calculated by using the formula:

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

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

22% = NT$2.0b ÷ NT$8.8b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. That means that for every NT$1 worth of shareholders' equity, the company generated NT$0.22 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 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 Sitronix Technology's Earnings Growth And 22% ROE

Firstly, we acknowledge that Sitronix Technology has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 11% which is quite remarkable. Probably as a result of this, Sitronix Technology was able to see a decent net income growth of 7.1% over the last five years.

We then compared Sitronix 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.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Sitronix Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Sitronix Technology Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 65% (or a retention ratio of 35%) for Sitronix Technology suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, Sitronix Technology has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 63%. Regardless, Sitronix Technology's ROE is speculated to decline to 16% despite there being no anticipated change in its payout ratio.

Conclusion

On the whole, we do feel that Sitronix Technology has some positive attributes. The company has grown its earnings moderately as previously discussed. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be quite low. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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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