Has WINSON Machinery Co., LTD.'s (GTSM:4538) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

WINSON Machinery (GTSM:4538) has had a great run on the share market with its stock up by a significant 16% over the last three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on WINSON Machinery's ROE.

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 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 WINSON Machinery

How To Calculate Return On Equity?

Return on equity 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 WINSON Machinery is:

3.3% = NT$22m ÷ NT$680m (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every NT$1 worth of equity, the company was able to earn NT$0.03 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

WINSON Machinery's Earnings Growth And 3.3% ROE

On the face of it, WINSON Machinery's ROE is not much to talk about. 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 5.7%. However, the moderate 7.6% net income growth seen by WINSON Machinery over the past five years is definitely a positive. So, the growth in the company's earnings could probably have been caused by other variables. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then performed a comparison between WINSON Machinery's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 7.3% in the same period.

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

Is WINSON Machinery Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 71% (or a retention ratio of 29%) for WINSON Machinery suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, WINSON Machinery has paid dividends over a period of eight years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

On the whole, we do feel that WINSON Machinery has some positive attributes. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into WINSON Machinery's past profit growth, check out this visualization of past earnings, revenue and cash flows.

If you’re looking to trade WINSON Machinery, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.