Taiwan Wax Company,Ltd.'s (GTSM:1742) Stock Is Going Strong: Have Financials A Role To Play?

Taiwan Wax CompanyLtd's (GTSM:1742) stock is up by a considerable 6.1% over the past month. As most would know, fundamentals are what usually guide market price movements over the long-term, 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. Specifically, we decided to study Taiwan Wax CompanyLtd's ROE in this article.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Taiwan Wax CompanyLtd

How To Calculate Return On Equity?

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 Taiwan Wax CompanyLtd is:

1.0% = NT$9.0m ÷ NT$863m (Based on the trailing twelve months to September 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$0.01 in profit.

What Has ROE Got To Do With 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.

Taiwan Wax CompanyLtd's Earnings Growth And 1.0% ROE

It is hard to argue that Taiwan Wax CompanyLtd's ROE is much good in and of itself. Even when compared to the industry average of 8.0%, the ROE figure is pretty disappointing. However, we we're pleasantly surprised to see that Taiwan Wax CompanyLtd grew its net income at a significant rate of 47% in the last five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Taiwan Wax CompanyLtd's growth is quite high when compared to the industry average growth of 1.0% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is Taiwan Wax CompanyLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Taiwan Wax CompanyLtd Making Efficient Use Of Its Profits?

Taiwan Wax CompanyLtd doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Conclusion

Overall, we feel that Taiwan Wax CompanyLtd certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 4 risks we have identified for Taiwan Wax CompanyLtd visit our risks dashboard for free.

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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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