Chicony Electronics Co., Ltd.'s (TPE:2385) Recent Stock Performance Looks Decent- Can Strong Fundamentals Be the Reason?

Chicony Electronics' (TPE:2385) stock up by 3.7% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Chicony Electronics' ROE in this article.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Chicony Electronics

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 Chicony Electronics is:

21% = NT$6.5b ÷ NT$31b (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every NT$1 worth of equity, the company was able to earn NT$0.21 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

A Side By Side comparison of Chicony Electronics' Earnings Growth And 21% ROE

First thing first, we like that Chicony Electronics has an impressive ROE. Secondly, even when compared to the industry average of 11% the company's ROE is quite impressive. Probably as a result of this, Chicony Electronics was able to see a decent net income growth of 9.2% over the last five years.

Next, on comparing with the industry net income growth, we found that Chicony Electronics' growth is quite high when compared to the industry average growth of 6.1% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is 2385 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Chicony Electronics Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 75% (or a retention ratio of 25%) for Chicony Electronics suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Chicony Electronics 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 72%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 22%.

Conclusion

Overall, we are quite pleased with Chicony Electronics' performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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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