Is Gold Circuit Electronics Ltd.'s (TWSE:2368) Recent Stock Performance Tethered To Its Strong Fundamentals?

Gold Circuit Electronics' (TWSE:2368) stock is up by a considerable 12% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Gold Circuit Electronics' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Gold Circuit Electronics

How Is ROE Calculated?

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 Gold Circuit Electronics is:

26% = NT$4.3b ÷ NT$17b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every NT$1 worth of equity, the company was able to earn NT$0.26 in profit.

What Has ROE Got To Do With 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. 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.

Gold Circuit Electronics' Earnings Growth And 26% 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 8.5% which is quite remarkable. Under the circumstances, Gold Circuit Electronics' considerable five year net income growth of 38% was to be expected.

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 12%.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Gold Circuit Electronics fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Gold Circuit Electronics Making Efficient Use Of Its Profits?

The three-year median payout ratio for Gold Circuit Electronics is 39%, which is moderately low. The company is retaining the remaining 61%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Gold Circuit Electronics is reinvesting its earnings efficiently.

Moreover, Gold Circuit Electronics is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 36%. As a result, Gold Circuit Electronics' ROE is not expected to change by much either, which we inferred from the analyst estimate of 30% for future ROE.

Conclusion

Overall, we are quite pleased with Gold Circuit Electronics' 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 sizeable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com