Declining Stock and Solid Fundamentals: Is The Market Wrong About International Games System Co., LTD (GTSM:3293)?

With its stock down 17% over the past three months, it is easy to disregard International Games System (GTSM:3293). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to International Games System's ROE today.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for International Games System

How Do You 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 International Games System is:

54% = NT$3.1b ÷ NT$5.8b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. So, this means that for every NT$1 of its shareholder's investments, the company generates a profit of NT$0.54.

What Is The Relationship Between ROE And 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. 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.

A Side By Side comparison of International Games System's Earnings Growth And 54% ROE

Firstly, we acknowledge that International Games System has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 15% which is quite remarkable. As a result, International Games System's exceptional 37% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared International Games System'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 24%.

Earnings growth is a huge factor in stock valuation. 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. What is 3293 worth today? The intrinsic value infographic in our free research report helps visualize whether 3293 is currently mispriced by the market.

Is International Games System Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 78% (implying that it keeps only 22% of profits) for International Games System suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Besides, International Games System has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 91% of its profits over the next three years. As a result, International Games System's ROE is not expected to change by much either, which we inferred from the analyst estimate of 53% for future ROE.

Summary

In total, we are pretty happy with International Games System's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on International Games System 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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