Is Lung Pien Vacuum Industry Co., Ltd.'s (GTSM:5267) Recent Performancer Underpinned By Weak Financials?

It is hard to get excited after looking at Lung Pien Vacuum Industry's (GTSM:5267) recent performance, when its stock has declined 7.0% over the past three months. Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. Particularly, we will be paying attention to Lung Pien Vacuum Industry's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Lung Pien Vacuum Industry

How Is ROE Calculated?

Return on equity 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 Lung Pien Vacuum Industry is:

7.5% = NT$43m ÷ NT$578m (Based on the trailing twelve months to June 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$0.07 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. 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.

Lung Pien Vacuum Industry's Earnings Growth And 7.5% ROE

At first glance, Lung Pien Vacuum Industry's ROE doesn't look very promising. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 9.9% either. Therefore, Lung Pien Vacuum Industry's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

Next, on comparing with the industry net income growth, we found that Lung Pien Vacuum Industry's reported growth was a little less than the industry growth of1.2% 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Lung Pien Vacuum Industry is trading on a high P/E or a low P/E, relative to its industry.

Is Lung Pien Vacuum Industry Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 85% (implying that the company keeps only 15% of its income) of its business to reinvest into its business), most of Lung Pien Vacuum Industry's profits are being paid to shareholders, which explains the absence of growth in earnings.

Additionally, Lung Pien Vacuum Industry has paid dividends over a period of seven years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

In total, we would have a hard think before deciding on any investment action concerning Lung Pien Vacuum Industry. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. Up till now, we've only made a short study of the company's growth data. You can do your own research on Lung Pien Vacuum Industry and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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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