AMPAK Technology Inc.'s (GTSM:6546) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

AMPAK Technology (GTSM:6546) has had a great run on the share market with its stock up by a significant 5.5% over the last month. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on AMPAK Technology's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for AMPAK Technology

How Do You Calculate Return On Equity?

The formula for ROE is:

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

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

16% = NT$167m ÷ NT$1.1b (Based on the trailing twelve months to June 2020).

The 'return' refers to a company's earnings over the last year. So, this means that for every NT$1 of its shareholder's investments, the company generates a profit of NT$0.16.

What Is The Relationship Between ROE And 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. 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.

A Side By Side comparison of AMPAK Technology's Earnings Growth And 16% ROE

To start with, AMPAK Technology's ROE looks acceptable. On comparing with the average industry ROE of 10.0% the company's ROE looks pretty remarkable. Needless to say, we are quite surprised to see that AMPAK Technology's net income shrunk at a rate of 14% over the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. These include low earnings retention or poor allocation of capital.

However, when we compared AMPAK Technology's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 1.5% in the same period. This is quite worrisome.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. 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 AMPAK Technology is trading on a high P/E or a low P/E, relative to its industry.

Is AMPAK Technology Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 95% (implying that 5.2% of the profits are retained), most of AMPAK Technology's profits are being paid to shareholders, which explains the company's shrinking earnings. With only very little left to reinvest into the business, growth in earnings is far from likely. Our risks dashboard should have the 2 risks we have identified for AMPAK Technology.

In addition, AMPAK Technology has been paying dividends over a period of five years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline.

Conclusion

Overall, we have mixed feelings about AMPAK Technology. In spite of the high ROE, the company has failed to see growth in its earnings due to it paying out most of its profits as dividend, with almost nothing left to invest into its own business. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of AMPAK Technology's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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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