Kaimei Electronic Corp.'s (TPE:2375) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Kaimei Electronic (TPE:2375) has had a great run on the share market with its stock up by a significant 127% over the last three months. 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. In this article, we decided to focus on Kaimei Electronic's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Kaimei Electronic

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Kaimei Electronic is:

7.7% = NT$569m ÷ NT$7.4b (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. That means that for every NT$1 worth of shareholders' equity, the company generated NT$0.08 in profit.

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 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.

A Side By Side comparison of Kaimei Electronic's Earnings Growth And 7.7% ROE

On the face of it, Kaimei Electronic's ROE is not much to talk about. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 9.9%. However, we we're pleasantly surprised to see that Kaimei Electronic grew its net income at a significant rate of 37% in the last five years. Therefore, there could be other reasons behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Kaimei Electronic's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 9.2% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about Kaimei Electronic's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Kaimei Electronic Making Efficient Use Of Its Profits?

Kaimei Electronic has a really low three-year median payout ratio of 19%, meaning that it has the remaining 81% left over to reinvest into its business. So it looks like Kaimei Electronic is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, Kaimei Electronic has paid dividends over a period of seven years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

In total, it does look like Kaimei Electronic has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 2 risks we have identified for Kaimei Electronic visit our risks dashboard for free.

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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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