Has Inventec Corporation (TPE:2356) Stock's Recent Performance Got Anything to Do With Its Financial Health?

Inventec's (TPE:2356) stock is up by 7.4% over the past three months. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Inventec'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Inventec

How To 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 Inventec is:

13% = NT$7.5b ÷ NT$58b (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$0.13 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Inventec's Earnings Growth And 13% ROE

To start with, Inventec's ROE looks acceptable. Even when compared to the industry average of 11% the company's ROE looks quite decent. Inventec's decent returns aren't reflected in Inventec'smediocre five year net income growth average of 4.8%. We reckon that a low growth, when returns are moderate could be the result of certain circumstances like low earnings retention or poor allocation of capital.

We then compared Inventec's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 6.1% in the same period, which is a bit concerning.

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. Doing so will help them establish if the stock's future looks promising or ominous. Is Inventec fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Inventec Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 81% (or a retention ratio of 19%), most of Inventec's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Additionally, Inventec 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 88% of its profits over the next three years. Accordingly, forecasts suggest that Inventec's future ROE will be 12% which is again, similar to the current ROE.

Summary

Overall, we feel that Inventec certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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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