Is Giga-Byte Technology Co., Ltd.'s (TPE:2376) Recent Stock Performance Influenced By Its Financials In Any Way?

Giga-Byte Technology's (TPE:2376) stock is up by 5.1% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. Particularly, we will be paying attention to Giga-Byte Technology'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Giga-Byte Technology

How To 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 Giga-Byte Technology is:

14% = NT$3.6b ÷ NT$26b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. One way to conceptualize this is that for each NT$1 of shareholders' capital it has, the company made NT$0.14 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Giga-Byte Technology's Earnings Growth And 14% ROE

To start with, Giga-Byte Technology's ROE looks acceptable. On comparing with the average industry ROE of 11% the company's ROE looks pretty remarkable. Despite this, Giga-Byte Technology's five year net income growth was quite low averaging at only 4.2%. This is generally not the case as when a company has a high rate of return it should usually also have a high earnings growth rate. Such a scenario is likely to take place when a company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

As a next step, we compared Giga-Byte Technology's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 6.1% 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. Doing so will help them establish if the stock's future looks promising or ominous. 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 Giga-Byte Technology is trading on a high P/E or a low P/E, relative to its industry.

Is Giga-Byte Technology Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 72% (that is, the company retains only 28% of its income) over the past three years for Giga-Byte Technology suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

Additionally, Giga-Byte Technology has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 72%. As a result, Giga-Byte Technology's ROE is not expected to change by much either, which we inferred from the analyst estimate of 17% for future ROE.

Conclusion

In total, it does look like Giga-Byte Technology has some positive aspects to its business. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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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