Tian Zheng International Precision Machinery Co., Ltd.'s (GTSM:6654) Has Been On A Rise But Financial Prospects Look Weak: Is The Stock Overpriced?

Most readers would already be aware that Tian Zheng International Precision Machinery's (GTSM:6654) stock increased significantly by 19% over the past three months. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. Particularly, we will be paying attention to Tian Zheng International Precision Machinery's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Tian Zheng International Precision Machinery

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 Tian Zheng International Precision Machinery is:

4.7% = NT$42m ÷ NT$887m (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each NT$1 of shareholders' capital it has, the company made NT$0.05 in profit.

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. 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.

Tian Zheng International Precision Machinery's Earnings Growth And 4.7% ROE

When you first look at it, Tian Zheng International Precision Machinery's ROE doesn't look that attractive. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 11% either. As a result, Tian Zheng International Precision Machinery reported a very low income growth of 2.3% over the past five years.

Next, on comparing with the industry net income growth, we found that Tian Zheng International Precision Machinery's reported growth was lower than the industry growth of 8.6% in the same period, which is not something we like to see.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. 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 Tian Zheng International Precision Machinery is trading on a high P/E or a low P/E, relative to its industry.

Is Tian Zheng International Precision Machinery Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 61% (or a retention ratio of 39%), most of Tian Zheng International Precision Machinery's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Additionally, Tian Zheng International Precision Machinery has paid dividends over a period of three years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

In total, we would have a hard think before deciding on any investment action concerning Tian Zheng International Precision Machinery. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. In brief, we think the company is risky and investors should think twice before making any final judgement on this company. Our risks dashboard would have the 3 risks we have identified for Tian Zheng International Precision Machinery.

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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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