Formosa Prosonic Industries Berhad (KLSE:FPI) share price has increased by 8.7% in the past three months. Given that the market rewards strong financials in the long run, I wonder if that will be the case this time as well. In this article, we have decided to focus on Formosa Prosonic Industries Berhad's ROE.
Return on equity or ROE tests how effectively a company is growing its value and managing investors' money. Simply put, it is used to evaluate a company's profitability compared to its equity.
Check out our latest analysis for Formosa Prosonic Industries Berhad.
How do you calculate return on equity?
Return on equity can be calculated using the following formula:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
So, based on the above formula, Formosa Prosonic Industries Berhad's ROE is:
22% = RM117m ÷ RM541m (Based on trailing 12 months to December 2023).
“Revenue” is the income a company has earned over the past year. One way he conceptualizes this is that for every RM1 of shareholders' equity, the company made his RM0.22 in profit.
Why is ROE important for profit growth?
So far, we have learned that ROE is a measure of a company's profitability. Now we need to assess how much profit the company reinvests or “retains” for future growth, which gives us an idea about the company's growth potential. Assuming everything else remains constant, the higher the ROE and profit retention, the higher the company's growth rate compared to companies that don't necessarily have these characteristics.
A side-by-side comparison of Formosa Prosonic Industries Berhad's earnings growth and ROE of 22%.
Firstly, Formosa Prosonic Industries Berhad seems to have a respectable ROE. His ROE for the company looks quite remarkable when compared to the industry average of his ROE of 8.5%. Perhaps as a result of this, Formosa Prosonic Industries Berhad has been able to grow its net income by an impressive 24% over the past five years. However, there may be other causes behind this growth. For example, the company's management may have made some good strategic decisions, or the company may have a low dividend payout ratio.
As a next step, we compared Formosa Prosonic Industries Berhad's net income growth with its industry. We're pleased to note that the company's growth rate is higher than the industry's average growth rate of 8.8%.
Earnings growth is an important metric to consider when evaluating a stock. It's important for investors to know whether the market is pricing in a company's expected earnings growth (or decline). Doing so will help you determine whether a stock's future is promising or ominous. If you're curious about Formosa Prosonic Industries Berhad's valuation, check out this gauge of its price-to-earnings ratio compared to its industry.
Does Formosa Prosonic Industries Berhad reinvest its profits efficiently?
Formosa Prosonic Industries Berhad's high three-year median payout ratio of 51% (meaning it only retained 49% of its profits) means that it returns most of its profits to shareholders. This suggests that the company's growth has not actually been hindered.
Furthermore, Formosa Prosonic Industries Berhad has been paying dividends for at least 10 years, which means the company is quite serious about sharing its profits with shareholders.
summary
Overall, I'm pretty satisfied with the performance of the Formosa Prosonic Industries Berhad. In particular, the high ROE is noteworthy, and is thought to be the basis for the significant profit growth. But the company keeps a small portion of its profits. That means the company was able to grow its revenue despite this, so that's not too bad. Until now, we've only skimmed the surface of the company's past performance by looking at the company's fundamentals.So it might be worth checking this free Detailed graph Analyze Formosa Prosonic Industries Berhad's historical earnings, revenue and cash flow to gain deeper insight into the company's performance.
Have feedback on this article? Curious about its content? contact Please contact us directly. Alternatively, email our editorial team at Simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and the articles are not intended as financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
