Is Kuen Ling Machinery Refrigerating Co., Ltd.'s (GTSM:4527) Recent Stock Performance Influenced By Its Financials In Any Way?

Most readers would already know that Kuen Ling Machinery Refrigerating's (GTSM:4527) stock increased by 1.5% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. Particularly, we will be paying attention to Kuen Ling Machinery Refrigerating's ROE today.

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.

View our latest analysis for Kuen Ling Machinery Refrigerating

How Do You Calculate Return On Equity?

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 Kuen Ling Machinery Refrigerating is:

15% = NT$214m ÷ NT$1.5b (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every NT$1 worth of equity, the company was able to earn NT$0.15 in profit.

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. 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 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.

Kuen Ling Machinery Refrigerating's Earnings Growth And 15% ROE

At first glance, Kuen Ling Machinery Refrigerating seems to have a decent ROE. On comparing with the average industry ROE of 9.8% the company's ROE looks pretty remarkable. However, we are curious as to how the high returns still resulted in flat growth for Kuen Ling Machinery Refrigerating in the past five years. Therefore, there could be some other aspects that could potentially be preventing the company from growing. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

We then compared Kuen Ling Machinery Refrigerating's net income growth with the industry and found that the company's growth figure is a bit less than the average industry growth rate of 1.2% in the same period.

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. Is Kuen Ling Machinery Refrigerating fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Kuen Ling Machinery Refrigerating Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 76% (meaning, the company retains only 24% of profits) for Kuen Ling Machinery Refrigerating suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

In addition, Kuen Ling Machinery Refrigerating has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

On the whole, we do feel that Kuen Ling Machinery Refrigerating has some positive attributes. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. 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 Kuen Ling Machinery Refrigerating'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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