ADDCN Technology's (GTSM:5287) stock is up by 3.7% over the past three months. Given that the stock prices usually follow long-term business performance, we wonder if the company's mixed financials could have any adverse effect on its current price price movement In this article, we decided to focus on ADDCN Technology'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.
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 ADDCN Technology is:
38% = NT$628m ÷ NT$1.7b (Based on the trailing twelve months to September 2020).
The 'return' is the profit over the last twelve months. Another way to think of that is that for every NT$1 worth of equity, the company was able to earn NT$0.38 in profit.
What Has ROE Got To Do With 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.
A Side By Side comparison of ADDCN Technology's Earnings Growth And 38% ROE
Firstly, we acknowledge that ADDCN Technology has a significantly high ROE. Secondly, even when compared to the industry average of 9.9% the company's ROE is quite impressive. However, for some reason, the higher returns aren't reflected in ADDCN Technology's meagre five year net income growth average of 4.8%. That's a bit unexpected from a company which has such a high rate of return. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or or poor allocation of capital.
As a next step, we compared ADDCN Technology's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 17% in the same period.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about ADDCN Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is ADDCN Technology Making Efficient Use Of Its Profits?
The high three-year median payout ratio of 91% (that is, the company retains only 8.8% of its income) over the past three years for ADDCN Technology suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.
In addition, ADDCN Technology has been paying dividends over a period of eight years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.
In total, we're a bit ambivalent about ADDCN Technology's performance. While the company does have a high rate of return, its low earnings retention is probably what's hampering its earnings growth. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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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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