AAEON Technology Inc.'s (TPE:6579) Has Been On A Rise But Financial Prospects Look Weak: Is The Stock Overpriced?

AAEON Technology (TPE:6579) has had a great run on the share market with its stock up by a significant 5.9% over the last month. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. Specifically, we decided to study AAEON Technology's ROE in this article.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for AAEON Technology

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 AAEON Technology is:

6.4% = NT$522m ÷ NT$8.2b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every NT$1 worth of equity, the company was able to earn NT$0.06 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. 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. 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 AAEON Technology's Earnings Growth And 6.4% ROE

At first glance, AAEON Technology's ROE doesn't look very promising. Next, when compared to the average industry ROE of 11%, the company's ROE leaves us feeling even less enthusiastic. As a result, AAEON Technology reported a very low income growth of 2.4% over the past five years.

Next, on comparing with the industry net income growth, we found that AAEON Technology's reported growth was lower than the industry growth of 6.1% in the same period, which is not something we like to see.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 AAEON Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is AAEON Technology Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 74% (or a retention ratio of 26%), most of AAEON Technology's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Additionally, AAEON Technology has paid dividends over a period of four years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning AAEON Technology. As a result of its low ROE and lack of mich reinvestment into the business, the company has seen a disappointing earnings growth rate. In brief, we think the company is risky and investors should think twice before making any final judgement on this company. Our risks dashboard will have the 1 risk we have identified for AAEON Technology.

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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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