SYNergy ScienTech Corp.'s (TPE:6558) Dismal Stock Performance Reflects Weak Fundamentals

By
Simply Wall St
Published
March 03, 2021
TWSE:6558
Source: Shutterstock

SYNergy ScienTech (TPE:6558) has had a rough three months with its share price down 12%. We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Particularly, we will be paying attention to SYNergy ScienTech's ROE today.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for SYNergy ScienTech

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 SYNergy ScienTech is:

2.9% = NT$39m ÷ NT$1.3b (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$0.03 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

A Side By Side comparison of SYNergy ScienTech's Earnings Growth And 2.9% ROE

On the face of it, SYNergy ScienTech's ROE is not much to talk about. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 8.0%. Hence, the flat earnings seen by SYNergy ScienTech over the past five years could probably be the result of it having a lower ROE.

As a next step, we compared SYNergy ScienTech's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 3.7% in the same period.

past-earnings-growth
TSEC:6558 Past Earnings Growth March 4th 2021

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is SYNergy ScienTech fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is SYNergy ScienTech Using Its Retained Earnings Effectively?

SYNergy ScienTech has a high three-year median payout ratio of 53% (or a retention ratio of 47%), meaning that the company is paying most of its profits as dividends to its shareholders. This does go some way in explaining why there's been no growth in its earnings.

Moreover, SYNergy ScienTech has been paying dividends for five years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

Overall, we would be extremely cautious before making any decision on SYNergy ScienTech. 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. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on SYNergy ScienTech 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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