Is Youngtek Electronics Corporation's (GTSM:6261) Recent Performance Market's Way Of Responding to Its Mixed Financials?

It is easy to overlook Youngtek Electronics' (GTSM:6261) given its unimpressive and roughly flat price performance over the past three months. Looking at its differing financials, we wonder if the market is focusing more on the company's negatives than on the positives resulting in the stock's drab performance. In this article, we decided to focus on Youngtek Electronics' ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. 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 Youngtek Electronics

How Do You 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 Youngtek Electronics is:

9.7% = NT$588m ÷ NT$6.0b (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$0.10 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Youngtek Electronics' Earnings Growth And 9.7% ROE

To start with, Youngtek Electronics' ROE looks acceptable. Further, the company's ROE is similar to the industry average of 11%. Despite this, Youngtek Electronics' five year net income growth was quite flat over the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

As a next step, we compared Youngtek Electronics' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 9.9% 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. Doing so will help them establish if the stock's future looks promising or ominous. What is 6261 worth today? The intrinsic value infographic in our free research report helps visualize whether 6261 is currently mispriced by the market.

Is Youngtek Electronics Using Its Retained Earnings Effectively?

Youngtek Electronics has a high three-year median payout ratio of 92% (or a retention ratio of 7.8%), meaning that the company is paying most of its profits as dividends to its shareholders. This does go some way in explaining why there's been no growth in its earnings.

Moreover, Youngtek Electronics has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

On the whole, we feel that the performance shown by Youngtek Electronics can be open to many interpretations. While the company does have a high rate of return, its low earnings retention is probably what's hampering its earnings growth. Up till now, we've only made a short study of the company's growth data. You can do your own research on Youngtek Electronics and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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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