Are Strong Financial Prospects The Force That Is Driving The Momentum In Gold Circuit Electronics Ltd.'s TPE:2368) Stock?

Gold Circuit Electronics (TPE:2368) has had a great run on the share market with its stock up by a significant 14% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Gold Circuit Electronics' 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.

Check out our latest analysis for Gold Circuit Electronics

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Gold Circuit Electronics is:

23% = NT$2.0b ÷ NT$8.9b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings 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$0.23 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

Gold Circuit Electronics' Earnings Growth And 23% ROE

To begin with, Gold Circuit Electronics has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 9.9% which is quite remarkable. So, the substantial 54% net income growth seen by Gold Circuit Electronics over the past five years isn't overly surprising.

As a next step, we compared Gold Circuit Electronics' 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 9.2%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for 2368? You can find out in our latest intrinsic value infographic research report.

Is Gold Circuit Electronics Making Efficient Use Of Its Profits?

Gold Circuit Electronics doesn't pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what's driving the high earnings growth number discussed above.

Conclusion

On the whole, we feel that Gold Circuit Electronics' performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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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