Shin Shin Natural Gas Company Limited's (TPE:9918) Has Had A Decent Run On The Stock market: Are Fundamentals In The Driver's Seat?

Most readers would already know that Shin Shin Natural Gas' (TPE:9918) stock increased by 6.7% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. In this article, we decided to focus on Shin Shin Natural Gas' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Shin Shin Natural Gas

How Is ROE Calculated?

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 Shin Shin Natural Gas is:

9.3% = NT$277m ÷ NT$3.0b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. So, this means that for every NT$1 of its shareholder's investments, the company generates a profit of NT$0.09.

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. 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.

Shin Shin Natural Gas' Earnings Growth And 9.3% ROE

At first glance, Shin Shin Natural Gas seems to have a decent ROE. Even when compared to the industry average of 11% the company's ROE looks quite decent. Despite the modest returns, Shin Shin Natural Gas' five year net income growth was quite low, averaging at only 2.7%. So, there could be some other factors at play that could be impacting the company's growth. For instance, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

We then compared Shin Shin Natural Gas' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 4.7% in the same period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about Shin Shin Natural Gas''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shin Shin Natural Gas Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 87% (that is, the company retains only 13% of its income) over the past three years for Shin Shin Natural Gas suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

In addition, Shin Shin Natural Gas has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

In total, it does look like Shin Shin Natural Gas has some positive aspects to its business. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. 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. You can see the 1 risk we have identified for Shin Shin Natural Gas by visiting our risks dashboard for free on our platform here.

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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.
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