Has Cherng Tay Technology Co., Ltd. (GTSM:4767) Stock's Recent Performance Got Anything to Do With Its Financial Health?

Most readers would already know that Cherng Tay Technology's (GTSM:4767) stock increased by 1.4% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. Particularly, we will be paying attention to Cherng Tay Technology's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. 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 Cherng Tay Technology

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Cherng Tay Technology is:

8.9% = NT$67m ÷ NT$755m (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$0.09.

What Has ROE Got To Do With 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.

A Side By Side comparison of Cherng Tay Technology's Earnings Growth And 8.9% ROE

To start with, Cherng Tay Technology's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 7.7%. Given the circumstances, we can't help but wonder why Cherng Tay Technology saw little to no growth in the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

Next, on comparing Cherng Tay Technology's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 1.0% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about Cherng Tay Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Cherng Tay Technology Efficiently Re-investing Its Profits?

Cherng Tay Technology has a high three-year median payout ratio of 92% (or a retention ratio of 7.8%), meaning that the company is paying most of its profits as dividends to its shareholders. This does go some way in explaining why there's been no growth in its earnings.

Additionally, Cherng Tay Technology has paid dividends over a period of three years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

On the whole, we do feel that Cherng Tay Technology has some positive attributes. Its earnings have grown respectably as we saw earlier, probably due to its high returns. However, it does reinvest little to almost none of its profits, so we wonder what effect this could have on its future growth prospects. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Cherng Tay 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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