Are Robust Financials Driving The Recent Rally In Sea Sonic Electronics Co., Ltd.'s (GTSM:6203) Stock?

Most readers would already be aware that Sea Sonic Electronics' (GTSM:6203) stock increased significantly by 42% over the past month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Sea Sonic Electronics' ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Sea Sonic Electronics

How Do You Calculate Return On Equity?

ROE 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 Sea Sonic Electronics is:

25% = NT$484m ÷ NT$2.0b (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. So, this means that for every NT$1 of its shareholder's investments, the company generates a profit of NT$0.25.

Why Is ROE Important For 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.

Sea Sonic Electronics' Earnings Growth And 25% ROE

First thing first, we like that Sea Sonic Electronics has an impressive ROE. Secondly, even when compared to the industry average of 10% the company's ROE is quite impressive. Probably as a result of this, Sea Sonic Electronics was able to see a decent net income growth of 19% over the last five years.

Next, on comparing with the industry net income growth, we found that Sea Sonic Electronics' growth is quite high when compared to the industry average growth of 9.0% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. 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. 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 Sea Sonic Electronics is trading on a high P/E or a low P/E, relative to its industry.

Is Sea Sonic Electronics Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 66% (or a retention ratio of 34%) for Sea Sonic Electronics suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Sea Sonic Electronics is determined to keep sharing its profits with shareholders which we infer from its long history of eight years of paying a dividend.

Summary

In total, we are pretty happy with Sea Sonic Electronics' performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Up till now, we've only made a short study of the company's growth data. To gain further insights into Sea Sonic Electronics' past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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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