Gallant Precision Machining Co., Ltd.'s (GTSM:5443) Has Been On A Rise But Financial Prospects Look Weak: Is The Stock Overpriced?

Gallant Precision Machining's (GTSM:5443) stock is up by a considerable 75% over the past three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. In this article, we decided to focus on Gallant Precision Machining'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Gallant Precision Machining

How Do You 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 Gallant Precision Machining is:

5.6% = NT$141m ÷ NT$2.5b (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. So, this means that for every NT$1 of its shareholder's investments, the company generates a profit of NT$0.06.

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. 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. 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.

Gallant Precision Machining's Earnings Growth And 5.6% ROE

At first glance, Gallant Precision Machining's ROE doesn't look very promising. Next, when compared to the average industry ROE of 11%, the company's ROE leaves us feeling even less enthusiastic. Hence, the flat earnings seen by Gallant Precision Machining over the past five years could probably be the result of it having a lower ROE.

As a next step, we compared Gallant Precision Machining's net income growth with the industry and discovered that the industry saw an average growth of 8.9% in the same period.

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. 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 Gallant Precision Machining is trading on a high P/E or a low P/E, relative to its industry.

Is Gallant Precision Machining Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 100% (implying that the company keeps only -0.4% of its income) of its business to reinvest into its business), most of Gallant Precision Machining's profits are being paid to shareholders, which explains the absence of growth in earnings.

In addition, Gallant Precision Machining has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

In total, we would have a hard think before deciding on any investment action concerning Gallant Precision Machining. The low ROE, combined with the fact that the company is paying out almost if not all, of its profits as dividends, has resulted in the lack or absence of growth in its earnings. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Gallant Precision Machining's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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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