Chunghwa Precision Test Tech. Co., Ltd.'s (GTSM:6510) Stock Is Going Strong: Is the Market Following Fundamentals?

Most readers would already be aware that Chunghwa Precision Test Tech's (GTSM:6510) stock increased significantly by 13% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Chunghwa Precision Test Tech's 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Chunghwa Precision Test Tech

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 Chunghwa Precision Test Tech is:

13% = NT$865m ÷ NT$6.8b (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$0.13.

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.

Chunghwa Precision Test Tech's Earnings Growth And 13% ROE

At first glance, Chunghwa Precision Test Tech seems to have a decent ROE. Especially when compared to the industry average of 9.9% the company's ROE looks pretty impressive. This probably laid the ground for Chunghwa Precision Test Tech's moderate 9.0% net income growth seen over the past five years.

As a next step, we compared Chunghwa Precision Test Tech's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 9.2% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. 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 Chunghwa Precision Test Tech is trading on a high P/E or a low P/E, relative to its industry.

Is Chunghwa Precision Test Tech Efficiently Re-investing Its Profits?

With a three-year median payout ratio of 46% (implying that the company retains 54% of its profits), it seems that Chunghwa Precision Test Tech is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Moreover, Chunghwa Precision Test Tech is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 48%. As a result, Chunghwa Precision Test Tech's ROE is not expected to change by much either, which we inferred from the analyst estimate of 13% for future ROE.

Summary

In total, we are pretty happy with Chunghwa Precision Test Tech's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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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