Declining Stock and Solid Fundamentals: Is The Market Wrong About Promate Solutions Corporation (GTSM:6577)?

Promate Solutions (GTSM:6577) has had a rough month with its share price down 8.5%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Promate Solutions' ROE in this article.

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.

View our latest analysis for Promate Solutions

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 Promate Solutions is:

21% = NT$219m ÷ NT$1.1b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. Another way to think of that is that for every NT$1 worth of equity, the company was able to earn NT$0.21 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Promate Solutions' Earnings Growth And 21% ROE

To begin with, Promate Solutions seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 9.9%. Probably as a result of this, Promate Solutions was able to see a decent growth of 9.4% over the last five years.

As a next step, we compared Promate Solutions' 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. 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 Promate Solutions is trading on a high P/E or a low P/E, relative to its industry.

Is Promate Solutions Making Efficient Use Of Its Profits?

While Promate Solutions has a three-year median payout ratio of 88% (which means it retains 12% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Besides, Promate Solutions 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 Promate Solutions' performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Up till now, we've only made a short study of the company's growth data. You can do your own research on Promate Solutions 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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