Weak financial stocks of Honmyue Enterprise Co., Ltd. (TPE: 1474) put an end to the current momentum of the share on its share price?

Most readers already know that Honmyue Enterprise (TPE: 1474) stock has increased significantly by 30% in the past three months. However, in this article, we have decided to focus on its weak fundamentals, as a company’s long-term financial performance is what the ultimatley dictates market outcomes. Specifically, we decided to study Honmyue Enterprise’s ROE in this article.

ROE or Return on Equity is a useful tool to assess how effectively a company can generate returns on the investment it has received from its shareholders. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

Check out our latest review for Honmyue Enterprise

How is the ROE calculated?

the return on equity formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, Honmyue Enterprise’s ROE is:

5.1% = NT $ 101 million ÷ NT $ 2.0 billion (based on the last twelve months up to December 2020).

The “return” is the profit of the last twelve months. One way to conceptualize this is that for every NT $ of shareholder capital it has, the company has made a profit of NT $ 0.05.

Why is ROE important for profit growth?

So far we’ve learned that ROE is a measure of a company’s profitability. Based on how much of that profit the company reinvests or “withholds”, and how effectively it does so, we are then able to assess a company’s profit growth potential. Generally speaking, all other things being equal, companies with a high return on equity and profit retention have a higher growth rate than companies that do not share these attributes.

Honmyue Enterprise profit growth and ROE of 5.1%

At first glance, Honmyue Enterprise’s ROE isn’t much to say. Another quick study shows that the company’s ROE also doesn’t compare to the industry average of 8.1%. Therefore, it might not be wrong to say that the 8.5% drop in five-year net income seen by Honmyue Enterprise was likely the result of lower ROE. We believe there could also be other aspects that negatively influence the company’s earnings outlook. For example, it is possible that the company has misallocated capital or that the company has a very high payout ratio.

So we compared Honmyue Enterprise’s performance to that of the industry and were disappointed to find that although the company was cutting profits, the industry increased its profits at a rate of 0.6% over the past year. the same period.

TSEC: 1474 Past profit growth April 26, 2021

The basis for attaching value to a business is, to a large extent, related to the growth of its profits. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This then helps them determine whether the stock is set for a bright or gloomy future. A 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 outlook. So, you might want to check whether Honmyue Enterprise is trading high P / E or low P / E, relative to its industry.

Is Honmyue Enterprise Using Profits Efficiently?

Honmyue Enterprise’s decline in earnings is not surprising given how the company spends most of its profits on dividends, judging by its three-year median payout ratio of 61% (or a retention rate of 39%). With very little left to reinvest in the business, earnings growth is far from likely. You can see the 5 risks we have identified for Honmyue Enterprise by visiting our risk dashboard for free on our platform here.

In addition, Honmyue Enterprise has paid dividends over a period of at least ten years, which means that the management of the company is committed to paying dividends even if it means little or no growth in earnings.

Conclusion

All in all, we would have thought well before deciding on any investment action regarding Honmyue Enterprise. The company has seen a lack of earnings growth due to withholding very little earnings and whatever it holds back is being reinvested at a very low rate of return. So far, we’ve only scratched the surface of the company’s past performance by looking at the fundamentals of the business. It might be worth checking this out free detailed graphic Honmyue Enterprise’s past earnings, as well as revenue and cash flow to gain a deeper insight into the company’s performance.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in the mentioned stocks.
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About Myra R.

Myra R.

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