Litemax Electronics Inc.'s (GTSM:4995) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 5.0% over the past three months, it is easy to disregard Litemax Electronics (GTSM:4995). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Litemax Electronics' 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Litemax Electronics

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 Litemax Electronics is:

13% = NT$107m ÷ NT$797m (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$0.13.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A Side By Side comparison of Litemax Electronics' Earnings Growth And 13% ROE

To begin with, Litemax Electronics seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 9.9%. This probably laid the ground for Litemax Electronics' moderate 14% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Litemax Electronics' growth is quite high when compared to the industry average growth of 9.2% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is 4995 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Litemax Electronics Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 91% (or a retention ratio of 8.5%) for Litemax Electronics suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Litemax Electronics is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Summary

In total, it does look like Litemax Electronics has some positive aspects to its business. Namely, its high earnings growth, which was likely due to its high ROE. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining hardly any of its profits. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Litemax Electronics' past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

If you’re looking to trade Litemax Electronics, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.