Powertip Technology Corporation (GTSM:6167) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

Powertip Technology (GTSM:6167) has had a great run on the share market with its stock up by a significant 12% over the last week. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Particularly, we will be paying attention to Powertip Technology's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Powertip Technology

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 Powertip Technology is:

5.4% = NT$80m ÷ NT$1.5b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings 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$0.05 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

Powertip Technology's Earnings Growth And 5.4% ROE

On the face of it, Powertip Technology's ROE is not much to talk about. Next, when compared to the average industry ROE of 11%, the company's ROE leaves us feeling even less enthusiastic. Thus, the low net income growth of 3.4% seen by Powertip Technology over the past five years could probably be the result of the low ROE.

As a next step, we compared Powertip Technology's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 8.9% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Powertip Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Powertip Technology Efficiently Re-investing Its Profits?

Summary

On the whole, we feel that the performance shown by Powertip Technology can be open to many interpretations. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 2 risks we have identified for Powertip Technology visit our risks dashboard for free.

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