Is Gold Circuit Electronics Ltd.'s (TWSE:2368) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Gold Circuit Electronics (TWSE:2368) has had a great run on the share market with its stock up by a significant 26% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Gold Circuit Electronics

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 Gold Circuit Electronics is:

27% = NT$5.5b ÷ NT$20b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. Another way to think of that is that for every NT$1 worth of equity, the company was able to earn NT$0.27 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. 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 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.

A Side By Side comparison of Gold Circuit Electronics' Earnings Growth And 27% ROE

To begin with, Gold Circuit Electronics has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 8.9% the company's ROE is quite impressive. As a result, Gold Circuit Electronics' exceptional 31% net income growth seen over the past five years, doesn't come as a surprise.

Next, on comparing with the industry net income growth, we found that Gold Circuit Electronics' growth is quite high when compared to the industry average growth of 10% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 Efficiently Re-investing 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%. By the looks of it, the dividend is well covered and Gold Circuit Electronics is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Gold Circuit Electronics has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 39% of its profits over the next three years. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 29%.

Conclusion

In total, we are pretty happy with Gold Circuit Electronics' performance. 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. 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.