Faraday Technology (TWSE:3035) has had a tough month, with its share price falling 13%. However, a closer look at its healthy financial position may give you reason to reconsider. Given that fundamentals usually drive long-term market outcomes, this company is worth keeping an eye on. In particular, we'll be looking at Faraday Technology's ROE today.
Return on equity (ROE) is an important factor to consider for a shareholder because it tells them how effectively their capital is being reinvested – in other words, how successful a company is in converting shareholder investments into profits.
View our latest analysis for Faraday Technology
How do you calculate return on equity?
The formula for calculating ROE is as follows:
Return on Equity = Net Income (from continuing operations) / Shareholders' Equity
So, based on the above formula, Faraday Technology's ROE is:
9.4% = NT$1.2bn ÷ NT$13bn (Based on the trailing twelve months to June 2024).
“Return” refers to profits over the last 12 months, meaning that for every NT$1 of shareholders' capital, the company generated NT$0.09 in profits.
Why is ROE important for earnings growth?
We've already mentioned that ROE serves as an efficient profit-generating indicator to predict a company's future earnings. Next, we need to evaluate how much of its profits the company reinvests or “retains” for future growth. This gives us an idea about the company's growth potential. Assuming all else remains constant, the higher the ROE and retained earnings, the better a company's growth rate will be compared to companies that don't necessarily have these characteristics.
Comparing Faraday Technology's Revenue Growth and 9.4% ROE
First, Faraday Technology's ROE appears to be high. Compared to the industry average of 11%, the company's ROE is quite good. This is supported by Faraday Technology's exceptional net income growth of 35% over the past five years. We believe there may also be other factors at play. For example, the company's management may have made good strategic decisions, or the company's dividend payout ratio may be low.
Secondly, when we compare it to the industry's net profit growth, we can see that Faraday Technology's growth is very high and impressive compared to the average industry growth of 12% during the same period.
TWSE:3035 Historical Earnings Growth August 19, 2024
Earnings growth is a big driver of stock valuation. What investors need to determine next is whether the expected earnings growth, or lack thereof, is already priced into the share price. Doing so will tell you if the stock is on the bright side or a quagmire awaits. 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 outlook. Therefore, it is a good idea to check whether Faraday Technology is trading at a high or low P/E relative to the industry.
Is Faraday Technology reinvesting its profits efficiently?
Faraday Technology's median dividend payout ratio over the past three years is an extremely high 57% (it retains only 43% of its profits), indicating that the company has been able to achieve high earnings growth despite returning the majority of its profits to shareholders.
Additionally, Faraday Technology is determined to continue distributing profits to shareholders, with a long history of paying dividends for at least 10 years. After studying the latest analyst consensus data, the company's dividend payout ratio is expected to fall to 34% over the next three years. Therefore, with the expected decline in the dividend payout ratio, the company's ROE is expected to rise to 32% over the same period.
Conclusion
Overall, we feel that Faraday Technology is performing very well, especially with its high ROE, which has contributed to its impressive revenue growth. The company has been able to grow its earnings despite only reinvesting a small portion of its profits, which is commendable. We also looked at the latest analyst forecasts, which show that the company's earnings growth is expected to be in line with its current growth rate. Are these analyst forecasts based on wider industry expectations, or on the company's fundamentals? Click here to go to the company's analyst forecasts page.
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This article by Simply Wall St is of general nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell a stock, and does not take into account your objectives or financial situation. We aim to provide long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned herein.
