Is CKM Applied Materials Corp.'s (GTSM:8930) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

CKM Applied Materials (GTSM:8930) has had a great run on the share market with its stock up by a significant 19% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study CKM Applied Materials' ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for CKM Applied Materials

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for CKM Applied Materials is:

2.2% = NT$24m ÷ NT$1.1b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. One way to conceptualize this is that for each NT$1 of shareholders' capital it has, the company made NT$0.02 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. 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.

CKM Applied Materials' Earnings Growth And 2.2% ROE

It is hard to argue that CKM Applied Materials' ROE is much good in and of itself. Even compared to the average industry ROE of 3.4%, the company's ROE is quite dismal. CKM Applied Materials was still able to see a decent net income growth of 5.4% over the past five years. Therefore, the growth in earnings could probably have been caused by other variables. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that the growth figure reported by CKM Applied Materials compares quite favourably to the industry average, which shows a decline of 2.7% in the same period.

Earnings growth is a huge factor in stock valuation. 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. If you're wondering about CKM Applied Materials''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is CKM Applied Materials Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 75% (or a retention ratio of 25%) for CKM Applied Materials suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, CKM Applied Materials is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Summary

In total, it does look like CKM Applied Materials has some positive aspects to its business. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on CKM Applied Materials 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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