Is Weakness In Chroma ATE Inc. (TPE:2360) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

Chroma ATE (TPE:2360) has had a rough three months with its share price down 3.9%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Chroma ATE's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Chroma ATE

How Do You 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 Chroma ATE is:

15% = NT$2.3b ÷ NT$15b (Based on the trailing twelve months to September 2020).

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$0.15 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. 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. 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.

Chroma ATE's Earnings Growth And 15% ROE

To begin with, Chroma ATE seems to have a respectable ROE. Especially when compared to the industry average of 9.9% the company's ROE looks pretty impressive. Probably as a result of this, Chroma ATE was able to see a decent growth of 8.7% over the last five years.

Next, on comparing Chroma ATE's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 9.2% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 Chroma ATE's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Chroma ATE Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 67% (or a retention ratio of 33%) for Chroma ATE suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Chroma ATE has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 68%. Regardless, the future ROE for Chroma ATE is predicted to rise to 20% despite there being not much change expected in its payout ratio.

Conclusion

In total, we are pretty happy with Chroma ATE's performance. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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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