Stock Analysis

Yung Zip Chemical Ind. Co., Ltd.'s (GTSM:4102) Has Had A Decent Run On The Stock market: Are Fundamentals In The Driver's Seat?

TPEX:4102
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Most readers would already know that Yung Zip Chemical Ind's (GTSM:4102) stock increased by 8.0% over the past three months. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Yung Zip Chemical Ind's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. 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 Yung Zip Chemical Ind

How Is ROE Calculated?

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 Yung Zip Chemical Ind is:

4.6% = NT$29m ÷ NT$634m (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$0.05.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Yung Zip Chemical Ind's Earnings Growth And 4.6% ROE

On the face of it, Yung Zip Chemical Ind's ROE is not much to talk about. Next, when compared to the average industry ROE of 8.3%, the company's ROE leaves us feeling even less enthusiastic. However, we we're pleasantly surprised to see that Yung Zip Chemical Ind grew its net income at a significant rate of 58% in the last five years. Therefore, there could be other reasons behind this growth. 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.

As a next step, we compared Yung Zip Chemical Ind'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 6.2%.

past-earnings-growth
GTSM:4102 Past Earnings Growth March 5th 2021

Earnings growth is an important metric to consider when valuing a stock. 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. 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 Yung Zip Chemical Ind is trading on a high P/E or a low P/E, relative to its industry.

Is Yung Zip Chemical Ind Efficiently Re-investing Its Profits?

Yung Zip Chemical Ind doesn't pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what's driving the high earnings growth number discussed above.

Conclusion

In total, it does look like Yung Zip Chemical Ind has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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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