Wistron Information Technology & Services Corporation's (GTSM:4953) Stock Been Rising: Are Strong Financials Guiding The Market?

Wistron Information Technology & Services' (GTSM:4953) stock up by 3.6% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Wistron Information Technology & Services' ROE.

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 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 Wistron Information Technology & Services

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Wistron Information Technology & Services is:

20% = NT$444m ÷ NT$2.2b (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$0.20 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

Wistron Information Technology & Services' Earnings Growth And 20% ROE

To start with, Wistron Information Technology & Services' ROE looks acceptable. On comparing with the average industry ROE of 15% the company's ROE looks pretty remarkable. This probably laid the ground for Wistron Information Technology & Services' significant 50% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Wistron Information Technology & Services' growth is quite high when compared to the industry average growth of 14% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. 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. Is Wistron Information Technology & Services fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Wistron Information Technology & Services Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 52% (implying that it keeps only 48% of profits) for Wistron Information Technology & Services suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Additionally, Wistron Information Technology & Services has paid dividends over a period of five years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

In total, we are pretty happy with Wistron Information Technology & Services' performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Wistron Information Technology & Services' past profit growth, check out this visualization 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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