Ample Electronic Technology Co.,Ltd.'s (GTSM:4760) Stock Is Going Strong: Is the Market Following Fundamentals?

Most readers would already be aware that Ample Electronic TechnologyLtd's (GTSM:4760) stock increased significantly by 26% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Ample Electronic TechnologyLtd'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Ample Electronic TechnologyLtd

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 Ample Electronic TechnologyLtd is:

19% = NT$104m ÷ NT$540m (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$0.19.

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. 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.

Ample Electronic TechnologyLtd's Earnings Growth And 19% ROE

At first glance, Ample Electronic TechnologyLtd seems to have a decent ROE. Especially when compared to the industry average of 11% the company's ROE looks pretty impressive. Probably as a result of this, Ample Electronic TechnologyLtd was able to see an impressive net income growth of 27% over the last five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Ample Electronic TechnologyLtd'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 8.9%.

Earnings growth is a huge factor in stock valuation. 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. 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 Ample Electronic TechnologyLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Ample Electronic TechnologyLtd Efficiently Re-investing Its Profits?

Ample Electronic TechnologyLtd's three-year median payout ratio is a pretty moderate 44%, meaning the company retains 56% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Ample Electronic TechnologyLtd is reinvesting its earnings efficiently.

Besides, Ample Electronic TechnologyLtd has been paying dividends over a period of five years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

On the whole, we feel that Ample Electronic TechnologyLtd's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. You can see the 3 risks we have identified for Ample Electronic TechnologyLtd by visiting our risks dashboard for free on our platform here.

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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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