Hotron Precision Electronic Industrial Co.,Ltd.'s (GTSM:3092) Stock Is Going Strong: Is the Market Following Fundamentals?

Hotron Precision Electronic IndustrialLtd (GTSM:3092) has had a great run on the share market with its stock up by a significant 48% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Hotron Precision Electronic IndustrialLtd's ROE in this article.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Hotron Precision Electronic IndustrialLtd

How Is ROE Calculated?

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 Hotron Precision Electronic IndustrialLtd is:

14% = NT$226m ÷ NT$1.6b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. So, this means that for every NT$1 of its shareholder's investments, the company generates a profit of NT$0.14.

What Is The Relationship Between ROE And 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.

Hotron Precision Electronic IndustrialLtd's Earnings Growth And 14% ROE

To start with, Hotron Precision Electronic IndustrialLtd's ROE looks acceptable. Especially when compared to the industry average of 7.9% the company's ROE looks pretty impressive. This probably laid the ground for Hotron Precision Electronic IndustrialLtd's moderate 14% net income growth seen over the past five years.

As a next step, we compared Hotron Precision Electronic IndustrialLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 3.7%.

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). This then helps them determine if the stock is placed for a bright or bleak future. Is Hotron Precision Electronic IndustrialLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Hotron Precision Electronic IndustrialLtd Using Its Retained Earnings Effectively?

Hotron Precision Electronic IndustrialLtd has a significant three-year median payout ratio of 81%, meaning that it is left with only 19% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Additionally, Hotron Precision Electronic IndustrialLtd 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.

Summary

Overall, we are quite pleased with Hotron Precision Electronic IndustrialLtd's performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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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