It is hard to get excited after looking at VIA Labs' (TPE:6756) recent performance, when its stock has declined 8.9% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to VIA Labs' ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
How To 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 VIA Labs is:
33% = NT$297m ÷ NT$902m (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$0.33 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 VIA Labs' Earnings Growth And 33% ROE
To begin with, VIA Labs has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 11% also doesn't go unnoticed by us. As a result, VIA Labs' exceptional 43% net income growth seen over the past five years, doesn't come as a surprise.
Next, on comparing with the industry net income growth, we found that VIA Labs' 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. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about VIA Labs''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is VIA Labs Efficiently Re-investing Its Profits?
VIA Labs has a significant three-year median payout ratio of 67%, meaning the company only retains 33% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.
While VIA Labs has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend.
On the whole, we feel that VIA Labs' performance has been quite good. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of VIA Labs' past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.
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