Has Tekom Technologies, Inc's (GTSM:6294) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Tekom Technologies (GTSM:6294) has had a great run on the share market with its stock up by a significant 9.0% over the last month. 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. Particularly, we will be paying attention to Tekom Technologies' ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Tekom Technologies

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Tekom Technologies is:

43% = NT$248m ÷ NT$581m (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$0.43 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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

A Side By Side comparison of Tekom Technologies' Earnings Growth And 43% ROE

First thing first, we like that Tekom Technologies has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 13% also doesn't go unnoticed by us. This probably laid the groundwork for Tekom Technologies' moderate 6.8% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Tekom Technologies' reported growth was lower than the industry growth of 16% in the same period, which is not something we like 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. If you're wondering about Tekom Technologies''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Tekom Technologies Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 85% (or a retention ratio of 15%) for Tekom Technologies suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, Tekom Technologies has paid dividends over a period of five years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

In total, it does look like Tekom Technologies has some positive aspects to its business. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Tekom Technologies' past profit growth, check out this visualization of past earnings, revenue and cash flows.

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