Are Robust Financials Driving The Recent Rally In Chang Wah Electromaterials Inc.'s (TWSE:8070) Stock?

Chang Wah Electromaterials (TWSE:8070) has had a great run on the share market with its stock up by a significant 35% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Chang Wah Electromaterials' 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Chang Wah Electromaterials

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Chang Wah Electromaterials is:

10% = NT$2.3b ÷ NT$22b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. That means that for every NT$1 worth of shareholders' equity, the company generated NT$0.10 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Chang Wah Electromaterials' Earnings Growth And 10% ROE

To begin with, Chang Wah Electromaterials seems to have a respectable ROE. Especially when compared to the industry average of 8.5% the company's ROE looks pretty impressive. This certainly adds some context to Chang Wah Electromaterials' decent 12% net income growth seen over the past five years.

Next, on comparing Chang Wah Electromaterials' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 12% over the last few years.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is Chang Wah Electromaterials fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Chang Wah Electromaterials Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 79% (or a retention ratio of 21%) for Chang Wah Electromaterials suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Chang Wah Electromaterials 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, we are pretty happy with Chang Wah Electromaterials' 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. Up till now, we've only made a short study of the company's growth data. You can do your own research on Chang Wah Electromaterials 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.