Is Trusval Technology Co., Ltd.'s (GTSM:6667) Recent Price Movement Underpinned By Its Weak Fundamentals?

It is hard to get excited after looking at Trusval Technology's (GTSM:6667) recent performance, when its stock has declined 6.8% over the past month. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. Specifically, we decided to study Trusval Technology'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Trusval Technology

How Is ROE Calculated?

The formula for ROE is:

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

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

11% = NT$88m ÷ NT$772m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. That means that for every NT$1 worth of shareholders' equity, the company generated NT$0.11 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Trusval Technology's Earnings Growth And 11% ROE

At first glance, Trusval Technology seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 9.7%. However, while Trusval Technology has a pretty respectable ROE, its five year net income decline rate was 18% . So, there might be some other aspects that could explain this. These include low earnings retention or poor allocation of capital.

That being said, we compared Trusval Technology's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 1.2% in the same period.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Trusval Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Trusval Technology Making Efficient Use Of Its Profits?

Trusval Technology has a high three-year median payout ratio of 95% (that is, it is retaining 4.9% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. With only very little left to reinvest into the business, growth in earnings is far from likely. You can see the 5 risks we have identified for Trusval Technology by visiting our risks dashboard for free on our platform here.

In addition, Trusval Technology has been paying dividends over a period of three years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline.

Conclusion

On the whole, we feel that the performance shown by Trusval Technology can be open to many interpretations. In spite of the high ROE, the company has failed to see growth in its earnings due to it paying out most of its profits as dividend, with almost nothing left to invest into its own business. Up till now, we've only made a short study of the company's growth data. To gain further insights into Trusval Technology's past profit growth, check out this visualization 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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