Declining Stock and Solid Fundamentals: Is The Market Wrong About Promate Electronic Co.,Ltd. (TWSE:6189)?

Promate ElectronicLtd (TWSE:6189) has had a rough three months with its share price down 10%. 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 Promate ElectronicLtd's 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Promate ElectronicLtd

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Promate ElectronicLtd is:

23% = NT$1.4b ÷ NT$6.2b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. That means that for every NT$1 worth of shareholders' equity, the company generated NT$0.23 in profit.

Why Is ROE Important For 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.

A Side By Side comparison of Promate ElectronicLtd's Earnings Growth And 23% ROE

To begin with, Promate ElectronicLtd has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 8.5% also doesn't go unnoticed by us. Probably as a result of this, Promate ElectronicLtd was able to see a decent net income growth of 17% over the last five years.

Next, on comparing with the industry net income growth, we found that Promate ElectronicLtd's growth is quite high when compared to the industry average growth of 12% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Promate ElectronicLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Promate ElectronicLtd Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 82% (or a retention ratio of 18%) for Promate ElectronicLtd suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Promate ElectronicLtd 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.

Summary

In total, we are pretty happy with Promate ElectronicLtd's performance. 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. 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 Promate ElectronicLtd'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.