Radiation Technology, Inc.'s (GTSM:6514) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

It is hard to get excited after looking at Radiation Technology's (GTSM:6514) recent performance, when its stock has declined 11% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Radiation Technology'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Radiation Technology

How To Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Radiation Technology is:

10% = NT$64m ÷ NT$635m (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every NT$1 worth of equity, the company was able to earn NT$0.10 in profit.

What Has ROE Got To Do With Earnings Growth?

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

Radiation Technology's Earnings Growth And 10% ROE

At first glance, Radiation Technology seems to have a decent ROE. Even when compared to the industry average of 9.7% the company's ROE looks quite decent. This certainly adds some context to Radiation Technology's exceptional 23% net income growth seen over the past five years. However, there could also be other drivers behind this growth. 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.

As a next step, we compared Radiation Technology's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 1.5%.

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. If you're wondering about Radiation Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Radiation Technology Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 61% (implying that it keeps only 39% of profits) for Radiation Technology suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Besides, Radiation Technology has been paying dividends over a period of five years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we are quite pleased with Radiation Technology's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Radiation Technology and see how it has performed in the past by looking at this FREE detailed graph 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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