Tachia Yung Ho Machine Industry Co., Ltd.'s (GTSM:2221) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

It is hard to get excited after looking at Tachia Yung Ho Machine Industry's (GTSM:2221) recent performance, when its stock has declined 9.4% over the past month. 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 Tachia Yung Ho Machine Industry's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Tachia Yung Ho Machine Industry

How To Calculate Return On Equity?

ROE 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 Tachia Yung Ho Machine Industry is:

9.0% = NT$73m ÷ NT$808m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. Another way to think of that is that for every NT$1 worth of equity, the company was able to earn NT$0.09 in profit.

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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Tachia Yung Ho Machine Industry's Earnings Growth And 9.0% ROE

To start with, Tachia Yung Ho Machine Industry's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 9.7%. This probably goes some way in explaining Tachia Yung Ho Machine Industry's moderate 8.5% growth over the past five years amongst other factors.

Next, on comparing with the industry net income growth, we found that Tachia Yung Ho Machine Industry's growth is quite high when compared to the industry average growth of 1.2% in the same period, which is great to see.

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 Tachia Yung Ho Machine Industry's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Tachia Yung Ho Machine Industry Using Its Retained Earnings Effectively?

While Tachia Yung Ho Machine Industry has a three-year median payout ratio of 63% (which means it retains 37% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Additionally, Tachia Yung Ho Machine Industry has paid dividends over a period of nine years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

Overall, we are quite pleased with Tachia Yung Ho Machine Industry's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of Tachia Yung Ho Machine Industry's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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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