Is Cypress Technology Co.,Ltd.'s (GTSM:3541) Stock Price Struggling As A Result Of Its Mixed Financials?

Cypress TechnologyLtd (GTSM:3541) has had a rough three months with its share price down 17%. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Specifically, we decided to study Cypress TechnologyLtd's ROE in this article.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Cypress TechnologyLtd

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 Cypress TechnologyLtd is:

20% = NT$187m ÷ NT$915m (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. So, this means that for every NT$1 of its shareholder's investments, the company generates a profit of NT$0.20.

What Has ROE Got To Do With 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.

Cypress TechnologyLtd's Earnings Growth And 20% ROE

To start with, Cypress TechnologyLtd's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 9.9%. Yet, Cypress TechnologyLtd has posted measly growth of 3.3% over the past five years. This is generally not the case as when a company has a high rate of return it should usually also have a high earnings growth rate. Such a scenario is likely to take place when a company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

We then compared Cypress TechnologyLtd's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 9.2% in the same period, which is a bit concerning.

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. What is 3541 worth today? The intrinsic value infographic in our free research report helps visualize whether 3541 is currently mispriced by the market.

Is Cypress TechnologyLtd Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 90% (or a retention ratio of 10.0%), most of Cypress TechnologyLtd's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Additionally, Cypress TechnologyLtd has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

Overall, we have mixed feelings about Cypress TechnologyLtd. In spite of the high ROE, the company has failed to see growth in its earnings due to it paying out most of its profits as dividend, with almost nothing left to invest into its own business. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. You can see the 3 risks we have identified for Cypress TechnologyLtd by visiting our risks dashboard for free on our platform here.

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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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