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Could The Market Be Wrong About Taitron Components Incorporated (NASDAQ:TAIT) Given Its Attractive Financial Prospects?

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Taitron Components (NASDAQ:TAIT) has had a rough month with its share price down 19%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Taitron Components' 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 received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Taitron Components

How To Calculate Return On Equity?

Return on equity 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 Taitron Components is:

12% = US$1.6m ÷ US$13m (Based on the trailing twelve months to March 2021).

The 'return' is the profit over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.12.

Why Is ROE Important For 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Taitron Components' Earnings Growth And 12% ROE

To begin with, Taitron Components seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 11%. Consequently, this likely laid the ground for the impressive net income growth of 52% seen over the past five years by Taitron Components. We reckon that there could also be other factors at play here. 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.

We then compared Taitron Components' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 11% in the same period.

past-earnings-growth
past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Taitron Components''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Taitron Components Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 71% (implying that it keeps only 29% of profits) for Taitron Components suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Moreover, Taitron Components is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend.

Summary

Overall, we are quite pleased with Taitron Components' performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Taitron Components' past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.