Most readers would already be aware that eCloudvalley Digital Technology's (GTSM:6689) stock increased significantly by 21% over the past month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to eCloudvalley Digital 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.
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 eCloudvalley Digital Technology is:
9.7% = NT$153m ÷ NT$1.6b (Based on the trailing twelve months to June 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$0.10 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. 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. 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.
eCloudvalley Digital Technology's Earnings Growth And 9.7% ROE
To begin with, eCloudvalley Digital Technology seems to have a respectable ROE. Be that as it may, the company's ROE is still quite lower than the industry average of 15%. However, we are pleased to see the impressive 43% net income growth reported by eCloudvalley Digital Technology over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. 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. Bear in mind, the company does have a respectable ROE. It is just that the industry ROE is higher. So this certainly also provides some context to the high earnings growth seen by the company.
We then compared eCloudvalley Digital Technology's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 14% in the same period.
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). Doing so will help them establish if the stock's future looks promising or ominous. Is eCloudvalley Digital Technology fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is eCloudvalley Digital Technology Efficiently Re-investing Its Profits?
eCloudvalley Digital Technology's ' three-year median payout ratio is on the lower side at 19% implying that it is retaining a higher percentage (81%) of its profits. So it looks like eCloudvalley Digital Technology is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Along with seeing a growth in earnings, eCloudvalley Digital Technology only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.
Overall, we are quite pleased with eCloudvalley Digital Technology's performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate.
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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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