Stock Analysis

Declining Stock and Decent Financials: Is The Market Wrong About Rafael Microelectronics, Inc. (GTSM:6568)?

TPEX:6568
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With its stock down 4.2% over the past week, it is easy to disregard Rafael Microelectronics (GTSM:6568). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Rafael Microelectronics' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Rafael Microelectronics

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 Rafael Microelectronics is:

10% = NT$140m ÷ NT$1.4b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. That means that for every NT$1 worth of shareholders' equity, the company generated NT$0.10 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. 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.

Rafael Microelectronics' Earnings Growth And 10% ROE

At first glance, Rafael Microelectronics seems to have a decent ROE. Even when compared to the industry average of 11% the company's ROE looks quite decent. However, we are curious as to how Rafael Microelectronics' decent returns still resulted in flat growth for Rafael Microelectronics in 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. These include low earnings retention or poor allocation of capital.

As a next step, we compared Rafael Microelectronics' net income growth with the industry and discovered that the industry saw an average growth of 9.9% in the same period.

past-earnings-growth
GTSM:6568 Past Earnings Growth March 11th 2021

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 Rafael Microelectronics''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Rafael Microelectronics Making Efficient Use Of Its Profits?

Rafael Microelectronics has a high three-year median payout ratio of 58% (or a retention ratio of 42%), 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.

Additionally, Rafael Microelectronics has paid dividends over a period of five years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

On the whole, we do feel that Rafael Microelectronics has some positive attributes. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. Up till now, we've only made a short study of the company's growth data. To gain further insights into Rafael Microelectronics' past profit growth, check out this visualization of past earnings, revenue and cash flows.

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