eGalax_eMPIA Technology Inc. (GTSM:3556) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

By
Simply Wall St
Published
January 02, 2021
TPEX:3556
Source: Shutterstock

Most readers would already be aware that eGalax_eMPIA Technology's (GTSM:3556) stock increased significantly by 14% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Particularly, we will be paying attention to eGalax_eMPIA Technology's ROE today.

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.

See our latest analysis for eGalax_eMPIA Technology

How To Calculate Return On Equity?

Return on equity can be calculated by using the formula:

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

So, based on the above formula, the ROE for eGalax_eMPIA Technology is:

18% = NT$206m ÷ NT$1.1b (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$0.18 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.

eGalax_eMPIA Technology's Earnings Growth And 18% ROE

To start with, eGalax_eMPIA Technology's ROE looks acceptable. Especially when compared to the industry average of 11% the company's ROE looks pretty impressive. Despite this, eGalax_eMPIA Technology's five year net income growth was quite flat over the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. These include low earnings retention or poor allocation of capital.

We then compared eGalax_eMPIA Technology's net income growth with the industry and found that the average industry growth rate was 8.9% in the same period.

past-earnings-growth
GTSM:3556 Past Earnings Growth January 3rd 2021

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is eGalax_eMPIA Technology fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is eGalax_eMPIA Technology Making Efficient Use Of Its Profits?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. We infer that the company has been reinvesting all of its profits to grow its business.

Summary

Overall, we have mixed feelings about eGalax_eMPIA Technology. Despite the high ROE, the company has a disappointing earnings growth number, due to its poor rate of reinvestment into its business. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on eGalax_eMPIA Technology 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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