Stock Analysis

TTY Biopharm Company Limited (GTSM:4105) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

TPEX:4105
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With its stock down 11% over the past three months, it is easy to disregard TTY Biopharm (GTSM:4105). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study TTY Biopharm's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for TTY Biopharm

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 TTY Biopharm is:

12% = NT$722m ÷ NT$5.8b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. So, this means that for every NT$1 of its shareholder's investments, the company generates a profit of NT$0.12.

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. 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.

TTY Biopharm's Earnings Growth And 12% ROE

To start with, TTY Biopharm's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 8.1%. For this reason, TTY Biopharm's five year net income decline of 6.0% raises the question as to why the high ROE didn't translate into earnings growth. We reckon that there could be some other factors at play here that are preventing the company's growth. These include low earnings retention or poor allocation of capital.

However, when we compared TTY Biopharm's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 5.9% in the same period. This is quite worrisome.

past-earnings-growth
GTSM:4105 Past Earnings Growth February 8th 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is 4105 worth today? The intrinsic value infographic in our free research report helps visualize whether 4105 is currently mispriced by the market.

Is TTY Biopharm Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 87% (implying that 13% of the profits are retained), most of TTY Biopharm's profits are being paid to shareholders, which explains the company's shrinking earnings. With only very little left to reinvest into the business, growth in earnings is far from likely. To know the 4 risks we have identified for TTY Biopharm visit our risks dashboard for free.

Additionally, TTY Biopharm has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 81%. Still, forecasts suggest that TTY Biopharm's future ROE will rise to 21% even though the the company's payout ratio is not expected to change by much.

Conclusion

On the whole, we do feel that TTY Biopharm has some positive attributes. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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