I-Chiun Precision Industry Co., Ltd.'s (TWSE:2486) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

I-Chiun Precision Industry's (TWSE:2486) stock is up by a considerable 11% over the past month. 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 an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for I-Chiun Precision Industry

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 I-Chiun Precision Industry is:

1.5% = NT$83m ÷ NT$5.4b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings 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$0.02 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. 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.

I-Chiun Precision Industry's Earnings Growth And 1.5% ROE

It is quite clear that I-Chiun Precision Industry's ROE is rather low. Even when compared to the industry average of 9.0%, the ROE figure is pretty disappointing. In spite of this, I-Chiun Precision Industry was able to grow its net income considerably, at a rate of 42% in the last five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

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 10%.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is I-Chiun Precision Industry fairly valued compared to other companies? These 3 valuation measures might help you decide.

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

I-Chiun Precision Industry has a significant three-year median payout ratio of 76%, meaning the company only retains 24% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Besides, I-Chiun Precision Industry has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we feel that I-Chiun Precision Industry certainly does have some positive factors to consider. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion 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. So it may be worth checking this free detailed graph of I-Chiun Precision Industry's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.