Are Strong Financial Prospects The Force That Is Driving The Momentum In Giga-Byte Technology Co., Ltd.'s TWSE:2376) Stock?

Giga-Byte Technology (TWSE:2376) has had a great run on the share market with its stock up by a significant 37% 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. In this article, we decided to focus on Giga-Byte Technology'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Giga-Byte Technology

How Do You Calculate Return On Equity?

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 Giga-Byte Technology is:

13% = NT$4.7b ÷ NT$36b (Based on the trailing twelve months to September 2023).

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$0.13 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Giga-Byte Technology's Earnings Growth And 13% ROE

To begin with, Giga-Byte Technology seems to have a respectable ROE. Even when compared to the industry average of 13% the company's ROE looks quite decent. Consequently, this likely laid the ground for the impressive net income growth of 26% seen over the past five years by Giga-Byte Technology. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

We then compared Giga-Byte Technology's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 14% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Giga-Byte Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

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

The high three-year median payout ratio of 60% (implying that it keeps only 40% of profits) for Giga-Byte Technology suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Moreover, Giga-Byte Technology is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 52% of its profits over the next three years. However, Giga-Byte Technology's ROE is predicted to rise to 23% despite there being no anticipated change in its payout ratio.

Conclusion

In total, we are pretty happy with Giga-Byte Technology's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.