Stock Analysis

Advanced Ceramic X Corporation's (GTSM:3152) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

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TPEX:3152
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Advanced Ceramic X's (GTSM:3152) stock is up by a considerable 21% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Advanced Ceramic X's 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Advanced Ceramic X

How Is ROE Calculated?

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 Advanced Ceramic X is:

22% = NT$737m ÷ NT$3.3b (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$0.22 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. 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. 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.

Advanced Ceramic X's Earnings Growth And 22% ROE

First thing first, we like that Advanced Ceramic X has an impressive ROE. Secondly, even when compared to the industry average of 10.0% the company's ROE is quite impressive. For this reason, Advanced Ceramic X's five year net income decline of 2.8% raises the question as to why the high ROE didn't translate into earnings growth. We reckon that there could be some other factors at play here that are preventing the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

That being said, we compared Advanced Ceramic X's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 1.5% in the same period.

past-earnings-growth
GTSM:3152 Past Earnings Growth December 15th 2020

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is Advanced Ceramic X fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Advanced Ceramic X Efficiently Re-investing Its Profits?

Advanced Ceramic X has a high three-year median payout ratio of 90% (that is, it is retaining 10% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. You can see the 3 risks we have identified for Advanced Ceramic X by visiting our risks dashboard for free on our platform here.

In addition, Advanced Ceramic X has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

Overall, we feel that Advanced Ceramic X certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Advanced Ceramic X's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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About TPEX:3152

Advanced Ceramic X

Advanced Ceramic X Corporation designs, manufactures, and sells RF front-end devices and modules for wireless communication applications in Taiwan, China, the United States, Hong Kong, and internationally.

Flawless balance sheet second-rate dividend payer.

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