General Interface Solution (GIS) Holding Limited (TPE:6456) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

General Interface Solution (GIS) Holding (TPE:6456) has had a rough three months with its share price down 14%. 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. In this article, we decided to focus on General Interface Solution (GIS) Holding's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for General Interface Solution (GIS) Holding

How To Calculate Return On Equity?

ROE 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 General Interface Solution (GIS) Holding is:

13% = NT$3.6b ÷ NT$27b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each NT$1 of shareholders' capital it has, the company made NT$0.13 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.

General Interface Solution (GIS) Holding's Earnings Growth And 13% ROE

At first glance, General Interface Solution (GIS) Holding seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 9.9%. This probably laid the ground for General Interface Solution (GIS) Holding's moderate 6.8% net income growth seen over the past five years.

As a next step, we compared General Interface Solution (GIS) Holding'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 9.2% in the same period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about General Interface Solution (GIS) Holding's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is General Interface Solution (GIS) Holding Making Efficient Use Of Its Profits?

General Interface Solution (GIS) Holding has a three-year median payout ratio of 35%, which implies that it retains the remaining 65% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Moreover, General Interface Solution (GIS) Holding is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 38% of its profits over the next three years. As a result, General Interface Solution (GIS) Holding's ROE is not expected to change by much either, which we inferred from the analyst estimate of 12% for future ROE.

Summary

In total, we are pretty happy with General Interface Solution (GIS) Holding's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a respectable growth in its earnings. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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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