Posiflex Technology, Inc.'s (TWSE:8114) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Posiflex Technology's (TWSE:8114) stock is up by a considerable 7.0% over the past week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Posiflex Technology's ROE today.

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.

See our latest analysis for Posiflex Technology

How To 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 Posiflex Technology is:

17% = NT$1.2b ÷ NT$6.9b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. That means that for every NT$1 worth of shareholders' equity, the company generated NT$0.17 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. 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. 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 Posiflex Technology's Earnings Growth And 17% ROE

At first glance, Posiflex Technology seems to have a decent ROE. On comparing with the average industry ROE of 8.9% the company's ROE looks pretty remarkable. This certainly adds some context to Posiflex Technology's decent 15% net income growth seen over the past five years.

As a next step, we compared Posiflex Technology'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 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. Is 8114 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Posiflex Technology Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 66% (or a retention ratio of 34%) for Posiflex Technology suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Posiflex Technology has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 66%. Still, forecasts suggest that Posiflex Technology's future ROE will rise to 28% even though the the company's payout ratio is not expected to change by much.

Conclusion

On the whole, we feel that Posiflex Technology's performance has been quite good. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. 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.