Will Weakness in Globetronics Technology Bhd's (KLSE:GTRONIC) Stock Prove Temporary Given Strong Fundamentals?

Globetronics Technology Bhd (KLSE:GTRONIC) has had a rough three months with its share price down 34%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Globetronics Technology Bhd's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Globetronics Technology Bhd

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Globetronics Technology Bhd is:

18% = RM52m ÷ RM290m (Based on the trailing twelve months to March 2021).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.18 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Globetronics Technology Bhd's Earnings Growth And 18% ROE

To begin with, Globetronics Technology Bhd seems to have a respectable ROE. Especially when compared to the industry average of 12% the company's ROE looks pretty impressive. This probably laid the ground for Globetronics Technology Bhd's moderate 6.3% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Globetronics Technology Bhd's reported growth was lower than the industry growth of 7.8% in the same period, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. What is GTRONIC worth today? The intrinsic value infographic in our free research report helps visualize whether GTRONIC is currently mispriced by the market.

Is Globetronics Technology Bhd Making Efficient Use Of Its Profits?

Globetronics Technology Bhd has a three-year median payout ratio of 35%, which implies that it retains the remaining 65% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Additionally, Globetronics Technology Bhd has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 82% over the next three years. Regardless, the future ROE for Globetronics Technology Bhd is speculated to rise to 26% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.

Conclusion

On the whole, we feel that Globetronics Technology Bhd's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a respectable growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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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