Visual Photonics Epitaxy Co., Ltd.'s (TWSE:2455) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

Visual Photonics Epitaxy (TWSE:2455) has had a rough week with its share price down 6.0%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Visual Photonics Epitaxy's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Visual Photonics Epitaxy

How To Calculate Return On Equity?

Return on equity 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 Visual Photonics Epitaxy is:

23% = NT$727m ÷ NT$3.2b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. Another way to think of that is that for every NT$1 worth of equity, the company was able to earn NT$0.23 in profit.

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. 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.

Visual Photonics Epitaxy's Earnings Growth And 23% ROE

To begin with, Visual Photonics Epitaxy has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 11% the company's ROE is quite impressive. However, we are curious as to how the high returns still resulted in a flat growth for Visual Photonics Epitaxy in the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

We then compared Visual Photonics Epitaxy's net income growth with the industry and found that the average industry growth rate was 9.9% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is 2455 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Visual Photonics Epitaxy Efficiently Re-investing Its Profits?

Visual Photonics Epitaxy has a high three-year median payout ratio of 87% (or a retention ratio of 13%), meaning that the company is paying most of its profits as dividends to its shareholders. This does go some way in explaining why there's been no growth in its earnings.

Moreover, Visual Photonics Epitaxy has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. 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 76%. Still, forecasts suggest that Visual Photonics Epitaxy's future ROE will rise to 30% even though the the company's payout ratio is not expected to change by much.

Summary

On the whole, we do feel that Visual Photonics Epitaxy has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.