Are Lagis Enterprise Co., Ltd.'s (GTSM:6730) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

By
Simply Wall St
Published
January 19, 2021
TPEX:6730

With its stock down 30% over the past three months, it is easy to disregard Lagis Enterprise (GTSM:6730). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Lagis Enterprise'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Lagis Enterprise

How To 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 Lagis Enterprise is:

12% = NT$54m ÷ NT$457m (Based on the trailing twelve months to June 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$0.12 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. 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. 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.

Lagis Enterprise's Earnings Growth And 12% ROE

To begin with, Lagis Enterprise seems to have a respectable ROE. Even when compared to the industry average of 11% the company's ROE looks quite decent. However, we are curious as to how Lagis Enterprise's decent returns still resulted in flat growth for Lagis Enterprise in the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. These include low earnings retention or poor allocation of capital.

Next, on comparing with the industry net income growth, we found that Lagis Enterprise's reported growth was lower than the industry growth of 10% in the same period, which is not something we like to see.

past-earnings-growth
GTSM:6730 Past Earnings Growth January 20th 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). Doing so will help them establish if the stock's future looks promising or ominous. Is Lagis Enterprise fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Lagis Enterprise Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 61% (implying that the company keeps only 39% of its income) of its business to reinvest into its business), most of Lagis Enterprise's profits are being paid to shareholders, which explains the absence of growth in earnings.

In addition, Lagis Enterprise only recently started paying a dividend so the management must have decided the shareholders prefer dividends over earnings growth.

Summary

In total, it does look like Lagis Enterprise has some positive aspects to its business. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Lagis Enterprise and see how it has performed in the past by looking at this FREE detailed graph 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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