Genomics BioSci & Tech. Co.,Ltd. (GTSM:4195) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

Genomics BioSci & Tech.Ltd (GTSM:4195) has had a great run on the share market with its stock up by a significant 12% over the last month. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Specifically, we decided to study Genomics BioSci & Tech.Ltd'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Genomics BioSci & Tech.Ltd

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Genomics BioSci & Tech.Ltd is:

1.7% = NT$10m ÷ NT$620m (Based on the trailing twelve months to June 2020).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each NT$1 of shareholders' capital it has, the company made NT$0.02 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Genomics BioSci & Tech.Ltd's Earnings Growth And 1.7% ROE

It is quite clear that Genomics BioSci & Tech.Ltd's ROE is rather low. Not just that, even compared to the industry average of 3.5%, the company's ROE is entirely unremarkable. In spite of this, Genomics BioSci & Tech.Ltd was able to grow its net income considerably, at a rate of 29% in the last five years. Therefore, there could be other reasons behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Genomics BioSci & Tech.Ltd'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 14%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Genomics BioSci & Tech.Ltd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Genomics BioSci & Tech.Ltd Efficiently Re-investing Its Profits?

The really high three-year median payout ratio of 435% for Genomics BioSci & Tech.Ltd suggests that the company is paying its shareholders more than what it is earning. However, this hasn't hampered its ability to grow as we saw earlier. With that said, it could be worth keeping an eye on the high payout ratio as that's a huge risk. Our risks dashboard should have the 3 risks we have identified for Genomics BioSci & Tech.Ltd.

Along with seeing a growth in earnings, Genomics BioSci & Tech.Ltd only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Conclusion

In total, we're a bit ambivalent about Genomics BioSci & Tech.Ltd's performance. Although the company has shown a pretty impressive growth in earnings, yet the low ROE and the low rate of reinvestment makes us skeptical about the continuity of that growth, especially when or if the business comes to face any threats. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Genomics BioSci & Tech.Ltd'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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