Could The Market Be Wrong About Arcadyan Technology Corporation (TPE:3596) Given Its Attractive Financial Prospects?

With its stock down 2.9% over the past month, it is easy to disregard Arcadyan Technology (TPE:3596). 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 Arcadyan Technology's 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Arcadyan Technology

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 Arcadyan Technology is:

12% = NT$1.4b ÷ NT$11b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. That means that for every NT$1 worth of shareholders' equity, the company generated NT$0.12 in profit.

What Has ROE Got To Do With 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. 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.

Arcadyan Technology's Earnings Growth And 12% ROE

At first glance, Arcadyan Technology seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 10.0%. This probably laid the ground for Arcadyan Technology's moderate 8.5% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Arcadyan Technology's growth is quite high when compared to the industry average growth of 1.5% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. 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 Arcadyan Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Arcadyan Technology Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 65% (or a retention ratio of 35%) for Arcadyan Technology suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Arcadyan Technology has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 68% of its profits over the next three years. Still, forecasts suggest that Arcadyan Technology's future ROE will rise to 17% even though the the company's payout ratio is not expected to change by much.

Summary

In total, we are pretty happy with Arcadyan Technology's performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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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