Dadi Early-Childhood Education Group Limited (GTSM:8437) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

By
Simply Wall St
Published
January 20, 2021
TPEX:8437
Source: Shutterstock

It is hard to get excited after looking at Dadi Early-Childhood Education Group's (GTSM:8437) recent performance, when its stock has declined 10% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Dadi Early-Childhood Education Group's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Dadi Early-Childhood Education Group

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 Dadi Early-Childhood Education Group is:

13% = NT$323m ÷ NT$2.4b (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. So, this means that for every NT$1 of its shareholder's investments, the company generates a profit of NT$0.13.

What Has ROE Got To Do With 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.

Dadi Early-Childhood Education Group's Earnings Growth And 13% ROE

To start with, Dadi Early-Childhood Education Group's ROE looks acceptable. Even when compared to the industry average of 13% the company's ROE looks quite decent. Consequently, this likely laid the ground for the decent growth of 16% seen over the past five years by Dadi Early-Childhood Education Group.

As a next step, we compared Dadi Early-Childhood Education Group's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 16% in the same period.

past-earnings-growth
GTSM:8437 Past Earnings Growth January 21st 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Dadi Early-Childhood Education Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Dadi Early-Childhood Education Group Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 53% (or a retention ratio of 47%) for Dadi Early-Childhood Education Group suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Dadi Early-Childhood Education Group is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend.

Summary

On the whole, we feel that Dadi Early-Childhood Education Group's performance has been quite good. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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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