Vanguard International Semiconductor Corporation's (GTSM:5347) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Vanguard International Semiconductor (GTSM:5347) has had a great run on the share market with its stock up by a significant 13% over the last month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Vanguard International Semiconductor's ROE in this article.

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.

Check out our latest analysis for Vanguard International Semiconductor

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 Vanguard International Semiconductor is:

21% = NT$6.0b ÷ NT$28b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. 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 Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Vanguard International Semiconductor's Earnings Growth And 21% ROE

First thing first, we like that Vanguard International Semiconductor has an impressive ROE. Secondly, even when compared to the industry average of 11% the company's ROE is quite impressive. Probably as a result of this, Vanguard International Semiconductor was able to see a decent net income growth of 7.3% 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 8.9% 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. If you're wondering about Vanguard International Semiconductor's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

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.

Moreover, Vanguard International Semiconductor is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 76%. Regardless, the future ROE for Vanguard International Semiconductor is predicted to rise to 27% despite there being not much change expected in its payout ratio.

Summary

On the whole, we feel that Vanguard International Semiconductor's performance has been quite good. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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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