Are Robust Financials Driving The Recent Rally In La Kaffa International Co., Ltd.'s (GTSM:2732) Stock?

Most readers would already be aware that La Kaffa International's (GTSM:2732) stock increased significantly by 7.6% over the past month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study La Kaffa International'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for La Kaffa International

How To Calculate Return On Equity?

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 La Kaffa International is:

11% = NT$189m ÷ NT$1.8b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each NT$1 of shareholders' capital it has, the company made NT$0.11 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. 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 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.

La Kaffa International's Earnings Growth And 11% ROE

To begin with, La Kaffa International seems to have a respectable ROE. Especially when compared to the industry average of 7.1% the company's ROE looks pretty impressive. Probably as a result of this, La Kaffa International was able to see a decent growth of 17% over the last five years.

Next, on comparing with the industry net income growth, we found that La Kaffa International's growth is quite high when compared to the industry average growth of 0.8% in the same period, which is great to see.

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 La Kaffa International fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is La Kaffa International Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 87% (or a retention ratio of 13%) for La Kaffa International suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, La Kaffa International has paid dividends over a period of eight years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

Overall, we are quite pleased with La Kaffa International's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. Up till now, we've only made a short study of the company's growth data. You can do your own research on La Kaffa International and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

When trading La Kaffa International or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.