Are Robust Financials Driving The Recent Rally In Chenming Electronic Tech. Corp.'s (TWSE:3013) Stock?

Chenming Electronic Tech's (TWSE:3013) stock is up by a considerable 41% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Chenming Electronic Tech'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Chenming Electronic Tech

How To Calculate Return On Equity?

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 Chenming Electronic Tech is:

11% = NT$421m ÷ NT$3.8b (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$0.11 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Chenming Electronic Tech's Earnings Growth And 11% ROE

To begin with, Chenming Electronic Tech seems to have a respectable ROE. Even when compared to the industry average of 12% the company's ROE looks quite decent. This probably goes some way in explaining Chenming Electronic Tech's significant 24% net income growth over the past five years amongst other factors. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Chenming Electronic Tech's growth is quite high when compared to the industry average growth of 10% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Chenming Electronic Tech's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Chenming Electronic Tech Using Its Retained Earnings Effectively?

Chenming Electronic Tech's ' three-year median payout ratio is on the lower side at 25% implying that it is retaining a higher percentage (75%) of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Additionally, Chenming Electronic Tech has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we feel that Chenming Electronic Tech's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.