Is GenMont Biotech Incorporation's (TPE:3164) Recent Price Movement Underpinned By Its Weak Fundamentals?

GenMont Biotech Incorporation (TPE:3164) has had a rough three months with its share price down 9.8%. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. In this article, we decided to focus on GenMont Biotech Incorporation's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for GenMont Biotech Incorporation

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 GenMont Biotech Incorporation is:

3.4% = NT$49m ÷ NT$1.5b (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$0.03.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

GenMont Biotech Incorporation's Earnings Growth And 3.4% ROE

At first glance, GenMont Biotech Incorporation's ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 3.5%. Moreover, we are quite pleased to see that GenMont Biotech Incorporation's net income grew significantly at a rate of 55% over the last five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings 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 GenMont Biotech Incorporation'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%.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is GenMont Biotech Incorporation fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is GenMont Biotech Incorporation Making Efficient Use Of Its Profits?

GenMont Biotech Incorporation's very high three-year median payout ratio of 138% suggests that the company is paying more to its shareholders 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. To know the 4 risks we have identified for GenMont Biotech Incorporation visit our risks dashboard for free.

Additionally, GenMont Biotech Incorporation has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

In total, we're a bit ambivalent about GenMont Biotech Incorporation'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. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on GenMont Biotech Incorporation 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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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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