Are Strong Financial Prospects The Force That Is Driving The Momentum In Evergreen Marine Corporation (Taiwan) Ltd.'s TWSE:2603) Stock?

Most readers would already be aware that Evergreen Marine Corporation (Taiwan)'s (TWSE:2603) stock increased significantly by 25% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Evergreen Marine Corporation (Taiwan)'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Evergreen Marine Corporation (Taiwan)

How Do You 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 Evergreen Marine Corporation (Taiwan) is:

15% = NT$76b ÷ NT$522b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every NT$1 of its shareholder's investments, the company generates a profit of NT$0.15.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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.

Evergreen Marine Corporation (Taiwan)'s Earnings Growth And 15% ROE

At first glance, Evergreen Marine Corporation (Taiwan) seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 8.4%. This probably laid the ground for Evergreen Marine Corporation (Taiwan)'s significant 28% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. 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 Evergreen Marine Corporation (Taiwan)'s net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 24% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 Evergreen Marine Corporation (Taiwan) is trading on a high P/E or a low P/E, relative to its industry.

Is Evergreen Marine Corporation (Taiwan) Making Efficient Use Of Its Profits?

Evergreen Marine Corporation (Taiwan)'s three-year median payout ratio is a pretty moderate 44%, meaning the company retains 56% of its income. So it seems that Evergreen Marine Corporation (Taiwan) is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Besides, Evergreen Marine Corporation (Taiwan) has been paying dividends over a period of nine years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 27% over the next three years. Regardless, the future ROE for Evergreen Marine Corporation (Taiwan) is predicted to decline to 9.5% despite the anticipated decrease in the payout ratio. We reckon that there could probably be other factors that could be driving the forseen decline in the company's ROE.

Summary

On the whole, we feel that Evergreen Marine Corporation (Taiwan)'s performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.