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Do Fundamentals Have Any Role To Play In Driving EPS Bio Technology Corp.'s (GTSM:4183) Stock Up Recently?
Most readers would already know that EPS Bio Technology's (GTSM:4183) stock increased by 4.7% over the past three months. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to EPS Bio Technology'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
Check out our latest analysis for EPS Bio Technology
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 EPS Bio Technology is:
11% = NT$34m ÷ NT$307m (Based on the trailing twelve months to September 2020).
The 'return' refers to a company's earnings over the last year. So, this means that for every NT$1 of its shareholder's investments, the company generates a profit of NT$0.11.
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. 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. 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.
EPS Bio Technology's Earnings Growth And 11% ROE
To begin with, EPS Bio Technology seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 11%. However, we are curious as to how EPS Bio Technology's decent returns still resulted in flat growth for EPS Bio Technology in the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
As a next step, we compared EPS Bio Technology'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 10% in the same period.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if EPS Bio Technology is trading on a high P/E or a low P/E, relative to its industry.
Is EPS Bio Technology Using Its Retained Earnings Effectively?
With a high three-year median payout ratio of 59% (implying that the company keeps only 41% of its income) of its business to reinvest into its business), most of EPS Bio Technology's profits are being paid to shareholders, which explains the absence of growth in earnings.
Moreover, EPS Bio Technology has been paying dividends for eight years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.
Summary
In total, it does look like EPS Bio Technology has some positive aspects to its business. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. Up till now, we've only made a short study of the company's growth data. To gain further insights into EPS Bio Technology's past profit growth, check out this visualization of past earnings, revenue and cash flows.
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Access Free AnalysisThis 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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About TPEX:4183
EPS Bio Technology
Manufactures and sells OEM/ODM blood glucose system in Taiwan.
Flawless balance sheet with proven track record.