Could The Market Be Wrong About Vanguard International Semiconductor Corporation (GTSM:5347) Given Its Attractive Financial Prospects?

Vanguard International Semiconductor (GTSM:5347) has had a rough month with its share price down 16%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Vanguard International Semiconductor's ROE.

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 Vanguard International Semiconductor

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 Vanguard International Semiconductor is:

21% = NT$6.3b ÷ NT$30b (Based on the trailing twelve months to December 2020).

The 'return' is the yearly profit. Another way to think of that is that for every NT$1 worth of equity, the company was able to earn NT$0.21 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

A Side By Side comparison of Vanguard International Semiconductor's Earnings Growth And 21% ROE

To begin with, Vanguard International Semiconductor has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 11% also doesn't go unnoticed by us. Probably as a result of this, Vanguard International Semiconductor was able to see a decent net income growth of 7.5% over the last five years.

We then performed a comparison between Vanguard International Semiconductor's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 9.0% in the same period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for 5347? You can find out in our latest intrinsic value infographic research report.

Is Vanguard International Semiconductor Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 88% (or a retention ratio of 12%) for Vanguard International Semiconductor suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Vanguard International Semiconductor has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. 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 72%. Still, forecasts suggest that Vanguard International Semiconductor's future ROE will rise to 28% even though the the company's payout ratio is not expected to change by much.

Summary

In total, we are pretty happy with Vanguard International Semiconductor's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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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