Declining Stock and Solid Fundamentals: Is The Market Wrong About Gatekeeper Systems Inc. (CVE:GSI)?

With its stock down 28% over the past three months, it is easy to disregard Gatekeeper Systems (CVE:GSI). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Gatekeeper Systems' ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. 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 Gatekeeper Systems

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Gatekeeper Systems is:

18% = CA$1.5m ÷ CA$8.5m (Based on the trailing twelve months to May 2020).

The 'return' is the income the business earned over the last year. So, this means that for every CA$1 of its shareholder's investments, the company generates a profit of CA$0.18.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

A Side By Side comparison of Gatekeeper Systems' Earnings Growth And 18% ROE

To start with, Gatekeeper Systems' ROE looks acceptable. Even when compared to the industry average of 18% the company's ROE looks quite decent. This probably goes some way in explaining Gatekeeper Systems' moderate 15% growth over the past five years amongst other factors.

Next, on comparing with the industry net income growth, we found that Gatekeeper Systems' growth is quite high when compared to the industry average growth of 9.4% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Gatekeeper Systems fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Gatekeeper Systems Using Its Retained Earnings Effectively?

Summary

On the whole, we feel that Gatekeeper Systems' performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. Our risks dashboard would have the 3 risks we have identified for Gatekeeper Systems.

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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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