Do Its Financials Have Any Role To Play In Driving I-Chiun Precision Industry Co., Ltd.'s (TWSE:2486) Stock Up Recently?

Most readers would already be aware that I-Chiun Precision Industry's (TWSE:2486) stock increased significantly by 15% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on I-Chiun Precision Industry's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for I-Chiun Precision Industry

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 I-Chiun Precision Industry is:

2.5% = NT$132m ÷ NT$5.3b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each NT$1 of shareholders' capital it has, the company made NT$0.02 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

I-Chiun Precision Industry's Earnings Growth And 2.5% ROE

It is quite clear that I-Chiun Precision Industry's ROE is rather low. Even compared to the average industry ROE of 8.7%, the company's ROE is quite dismal. Despite this, surprisingly, I-Chiun Precision Industry saw an exceptional 47% net income growth over the past five years. Therefore, there could be other reasons behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared I-Chiun Precision Industry's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 11%.

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. If you're wondering about I-Chiun Precision Industry's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is I-Chiun Precision Industry Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 71% (implying that it keeps only 29% of profits) for I-Chiun Precision Industry suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Moreover, I-Chiun Precision Industry is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Conclusion

In total, it does look like I-Chiun Precision Industry 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. You can do your own research on I-Chiun Precision Industry and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.