NEXCOM International Co., Ltd.'s (GTSM:8234) Stock Financial Prospects Look Bleak: Should Shareholders Be Prepared For A Share Price Correction?

NEXCOM International's (GTSM:8234) stock up by 6.9% over the past three months. Given that the markets usually pay for the long-term financial health of a company, we wonder if the current momentum in the share price will keep up, given that the company's financials don't look very promising. Particularly, we will be paying attention to NEXCOM International'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for NEXCOM International

How To Calculate Return On Equity?

Return on equity 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 NEXCOM International is:

6.2% = NT$168m ÷ NT$2.7b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. That means that for every NT$1 worth of shareholders' equity, the company generated NT$0.06 in profit.

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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

NEXCOM International's Earnings Growth And 6.2% ROE

On the face of it, NEXCOM International's ROE is not much to talk about. Next, when compared to the average industry ROE of 9.9%, the company's ROE leaves us feeling even less enthusiastic. Therefore, NEXCOM International's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

We then compared NEXCOM International's net income growth with the industry and found that the average industry growth rate was 9.2% 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. Doing so will help them establish if the stock's future looks promising or ominous. Is NEXCOM International fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is NEXCOM International Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 57% (implying that the company keeps only 43% of its income) of its business to reinvest into its business), most of NEXCOM International's profits are being paid to shareholders, which explains the absence of growth in earnings.

In addition, NEXCOM International has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

On the whole, NEXCOM International's performance is quite a big let-down. As a result of its low ROE and lack of mich reinvestment into the business, the company has seen a disappointing earnings growth rate. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of NEXCOM International'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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