BenQ Medical Technology Corporation's (GTSM:4116) Stock Financial Prospects Look Bleak: Should Shareholders Be Prepared For A Share Price Correction?

By
Simply Wall St
Published
April 22, 2021
TPEX:4116

BenQ Medical Technology's (GTSM:4116) stock up by 9.1% over the past three months. Given that the markets usually pay for the long-term financial health of a company, we wonder if the current momentum in the share price will keep up, given that the company's financials don't look very promising. Particularly, we will be paying attention to BenQ Medical Technology'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. 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 BenQ Medical Technology

How Do You 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 BenQ Medical Technology is:

7.5% = NT$84m ÷ NT$1.1b (Based on the trailing twelve months to December 2020).

The 'return' refers to a company's earnings over the last year. That means that for every NT$1 worth of shareholders' equity, the company generated NT$0.08 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

A Side By Side comparison of BenQ Medical Technology's Earnings Growth And 7.5% ROE

At first glance, BenQ Medical Technology's ROE doesn't look very promising. 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 12%. Hence, the flat earnings seen by BenQ Medical Technology over the past five years could probably be the result of it having a lower ROE.

We then compared BenQ Medical Technology's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 8.1% in the same period, which is a bit concerning.

past-earnings-growth
GTSM:4116 Past Earnings Growth April 23rd 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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is BenQ Medical Technology fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is BenQ Medical Technology Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 90% (implying that the company keeps only 9.7% of its income) of its business to reinvest into its business), most of BenQ Medical Technology's profits are being paid to shareholders, which explains the absence of growth in earnings.

Moreover, BenQ Medical Technology has been paying dividends for at least ten years or more 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 BenQ Medical Technology. Specifically, it has shown quite an unsatisfactory performance as far as earnings growth is concerned, and a poor ROE and an equally poor rate of reinvestment seem to be the reason behind this inadequate performance. Up till now, we've only made a short study of the company's growth data. To gain further insights into BenQ Medical Technology's past profit growth, check out this visualization 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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