Eson Precision Ind. Co., Ltd.'s (TPE:5243) Stock Is Going Strong: Have Financials A Role To Play?

Most readers would already be aware that Eson Precision Ind's (TPE:5243) stock increased significantly by 52% over the past 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. Specifically, we decided to study Eson Precision Ind'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Eson Precision Ind

How Is ROE Calculated?

Return on equity 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 Eson Precision Ind is:

7.8% = NT$440m ÷ NT$5.7b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. That means that for every NT$1 worth of shareholders' equity, the company generated NT$0.08 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Eson Precision Ind's Earnings Growth And 7.8% ROE

At first glance, Eson Precision Ind's ROE doesn't look very promising. 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%. Eson Precision Ind was still able to see a decent net income growth of 7.4% over the past five years. So, the growth in the company's earnings could probably have been caused by other variables. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Eson Precision Ind's net income growth with the industry and found that the company has a similar growth figure when compared with 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). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Eson Precision Ind's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Eson Precision Ind Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 69% (or a retention ratio of 31%) for Eson Precision Ind suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

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

Conclusion

In total, it does look like Eson Precision Ind has some positive aspects to its business. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Eson Precision Ind's past profit growth, check out this visualization of past earnings, revenue and cash flows.

If you’re looking to trade Eson Precision Ind, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.