Declining Stock and Decent Financials: Is The Market Wrong About Baotek Industrial Materials Ltd. (GTSM:5340)?

It is hard to get excited after looking at Baotek Industrial Materials' (GTSM:5340) recent performance, when its stock has declined 5.7% over the past month. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Baotek Industrial Materials' ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Baotek Industrial Materials

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 Baotek Industrial Materials is:

5.9% = NT$104m ÷ NT$1.8b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. That means that for every NT$1 worth of shareholders' equity, the company generated NT$0.06 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. 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.

Baotek Industrial Materials' Earnings Growth And 5.9% ROE

At first glance, Baotek Industrial Materials' ROE doesn't look very promising. Next, when compared to the average industry ROE of 9.9%, the company's ROE leaves us feeling even less enthusiastic. In spite of this, Baotek Industrial Materials was able to grow its net income considerably, at a rate of 43% in the last five years. We reckon that there could 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.

We then compared Baotek Industrial Materials' 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 9.2% in the same period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Baotek Industrial Materials is trading on a high P/E or a low P/E, relative to its industry.

Is Baotek Industrial Materials Efficiently Re-investing Its Profits?

Conclusion

In total, it does look like Baotek Industrial Materials has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business.

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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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