Stock Analysis

# Delta Electronics, Inc.'s (TPE:2308) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

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Most readers would already be aware that Delta Electronics' (TPE:2308) stock increased significantly by 10% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Delta Electronics' 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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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### 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 Delta Electronics is:

14% = NT\$25b ÷ NT\$173b (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\$0.14.

### Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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 Delta Electronics' Earnings Growth And 14% ROE

To start with, Delta Electronics' ROE looks acceptable. Especially when compared to the industry average of 9.9% the company's ROE looks pretty impressive. Despite this, Delta Electronics' five year net income growth was quite low averaging at only 4.3%. This is interesting as the high returns should mean that the company has the ability to generate high growth but for some reason, it hasn't been able to do so. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or poor allocation of capital.

As a next step, we compared Delta Electronics' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 9.2% in the same period.

Earnings growth is a huge factor in stock valuation. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Delta Electronics is trading on a high P/E or a low P/E, relative to its industry.

### Is Delta Electronics Making Efficient Use Of Its Profits?

Delta Electronics has a three-year median payout ratio of 69% (implying that it keeps only 31% of its profits), meaning that it pays out most of its profits to shareholders as dividends, and as a result, the company has seen low earnings growth.

Additionally, Delta Electronics has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no 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 57%. Regardless, the future ROE for Delta Electronics is predicted to rise to 19% despite there being not much change expected in its payout ratio.

### Conclusion

In total, it does look like Delta Electronics has some positive aspects to its business. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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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