Is Weakness In Sentien Printing Factory Co., Ltd. (GTSM:8410) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

With its stock down 3.2% over the past week, it is easy to disregard Sentien Printing Factory (GTSM:8410). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Sentien Printing Factory'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Sentien Printing Factory

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Sentien Printing Factory is:

10% = NT$153m ÷ NT$1.5b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. Another way to think of that is that for every NT$1 worth of equity, the company was able to earn NT$0.10 in profit.

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. 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.

Sentien Printing Factory's Earnings Growth And 10% ROE

At first glance, Sentien Printing Factory seems to have a decent ROE. On comparing with the average industry ROE of 7.7% the company's ROE looks pretty remarkable. This certainly adds some context to Sentien Printing Factory's exceptional 24% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Sentien Printing Factory's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 1.0%.

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. This then helps them determine if the stock is placed for a bright or bleak future. 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 Sentien Printing Factory is trading on a high P/E or a low P/E, relative to its industry.

Is Sentien Printing Factory Making Efficient Use Of Its Profits?

Sentien Printing Factory has a significant three-year median payout ratio of 54%, meaning the company only retains 46% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Additionally, Sentien Printing Factory has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we feel that Sentien Printing Factory's performance has been quite good. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Up till now, we've only made a short study of the company's growth data. To gain further insights into Sentien Printing Factory'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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