Lotes Co., Ltd's (TWSE:3533) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

Lotes (TWSE:3533) has had a rough week with its share price down 7.6%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Lotes' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Lotes

How Is ROE Calculated?

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 Lotes is:

22% = NT$7.7b ÷ NT$35b (Based on the trailing twelve months to September 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$0.22 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. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Lotes' Earnings Growth And 22% ROE

To begin with, Lotes has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 8.7% the company's ROE is quite impressive. So, the substantial 26% net income growth seen by Lotes over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that Lotes' growth is quite high when compared to the industry average growth of 11% in the same period, which is great to see.

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. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for 3533? You can find out in our latest intrinsic value infographic research report.

Is Lotes Using Its Retained Earnings Effectively?

Lotes' three-year median payout ratio is a pretty moderate 44%, meaning the company retains 56% of its income. By the looks of it, the dividend is well covered and Lotes is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Lotes 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 44%. However, Lotes' ROE is predicted to rise to 27% despite there being no anticipated change in its payout ratio.

Conclusion

Overall, we are quite pleased with Lotes' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.