Macnica Galaxy Inc.'s (GTSM:6227) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Macnica Galaxy (GTSM:6227) has had a great run on the share market with its stock up by a significant 25% over the last month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Macnica Galaxy's ROE.

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.

Check out our latest analysis for Macnica Galaxy

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 Macnica Galaxy is:

9.8% = NT$166m ÷ NT$1.7b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each NT$1 of shareholders' capital it has, the company made NT$0.10 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Macnica Galaxy's Earnings Growth And 9.8% ROE

At first glance, Macnica Galaxy seems to have a decent ROE. Even when compared to the industry average of 10% the company's ROE looks quite decent. Macnica Galaxy's decent returns aren't reflected in Macnica Galaxy'smediocre five year net income growth average of 3.7%. We reckon that a low growth, when returns are moderate could be the result of certain circumstances like low earnings retention or poor allocation of capital.

Next, on comparing with the industry net income growth, we found that Macnica Galaxy's reported growth was lower than the industry growth of 9.0% in the same period, which is not something we like to see.

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. Is Macnica Galaxy fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Macnica Galaxy Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 53% (that is, the company retains only 47% of its income) over the past three years for Macnica Galaxy suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

In addition, Macnica Galaxy 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

On the whole, we do feel that Macnica Galaxy has some positive attributes. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 3 risks we have identified for Macnica Galaxy visit our risks dashboard for free.

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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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