Could The Market Be Wrong About Chunghwa Precision Test Tech. Co., Ltd. (GTSM:6510) Given Its Attractive Financial Prospects?

Chunghwa Precision Test Tech (GTSM:6510) has had a rough month with its share price down 8.7%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Chunghwa Precision Test Tech's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See 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$934m ÷ NT$7.0b (Based on the trailing twelve months to December 2020).

The 'return' is the yearly profit. So, this means that for every NT$1 of its shareholder's investments, the company generates a profit of NT$0.13.

What Has ROE Got To Do With 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

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 10% the company's ROE looks pretty impressive. This probably laid the ground for Chunghwa Precision Test Tech's moderate 8.4% net income growth seen over the past five years.

We then performed a comparison between Chunghwa Precision Test Tech's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 9.0% in the same period.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is Chunghwa Precision Test Tech fairly valued compared to other companies? These 3 valuation measures might help you decide.

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

Chunghwa Precision Test Tech has a three-year median payout ratio of 46%, which implies that it retains the remaining 54% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 44% of its profits over the next three years. Accordingly, forecasts suggest that Chunghwa Precision Test Tech's future ROE will be 15% which is again, similar to the current ROE.

Summary

In total, we are pretty happy with Chunghwa Precision Test Tech's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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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