Are Farglory Free Trade Zone Investment Holding Co., Ltd's (TPE:5607) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

Farglory Free Trade Zone Investment Holding (TPE:5607) has had a rough three months with its share price down 5.5%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Farglory Free Trade Zone Investment Holding'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Farglory Free Trade Zone Investment Holding

How Do You 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 Farglory Free Trade Zone Investment Holding is:

6.3% = NT$422m ÷ NT$6.7b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every NT$1 worth of equity, the company was able to earn NT$0.06 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.

A Side By Side comparison of Farglory Free Trade Zone Investment Holding's Earnings Growth And 6.3% ROE

On the face of it, Farglory Free Trade Zone Investment Holding's ROE is not much to talk about. Next, when compared to the average industry ROE of 14%, the company's ROE leaves us feeling even less enthusiastic. In spite of this, Farglory Free Trade Zone Investment Holding was able to grow its net income considerably, at a rate of 25% in the last five years. We reckon that there could be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Farglory Free Trade Zone Investment Holding's growth is quite high when compared to the industry average growth of 9.9% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Farglory Free Trade Zone Investment Holding's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Farglory Free Trade Zone Investment Holding Using Its Retained Earnings Effectively?

Farglory Free Trade Zone Investment Holding's three-year median payout ratio is a pretty moderate 30%, meaning the company retains 70% of its income. By the looks of it, the dividend is well covered and Farglory Free Trade Zone Investment Holding is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Farglory Free Trade Zone Investment Holding has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we feel that Farglory Free Trade Zone Investment Holding certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard will have the 1 risk we have identified for Farglory Free Trade Zone Investment Holding.

When trading Farglory Free Trade Zone Investment Holding or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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