Howteh Technology’s (GTSM:3114) stock is up by a considerable 16% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company’s key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Howteh Technology’s ROE in this article.
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 Howteh 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 Howteh Technology is:
7.6% = NT$82m ÷ NT$1.1b (Based on the trailing twelve months to September 2020).
The ‘return’ is the profit over the last twelve months. One way to conceptualize this is that for each NT$1 of shareholders’ capital it has, the company made NT$0.08 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. 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. 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.
Howteh Technology’s Earnings Growth And 7.6% ROE
At first glance, Howteh Technology’s ROE doesn’t look very promising. Next, when compared to the average industry ROE of 9.9%, the company’s ROE leaves us feeling even less enthusiastic. However, we we’re pleasantly surprised to see that Howteh Technology grew its net income at a significant rate of 27% in the last five years. So, there might be other aspects that are positively influencing the company’s earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.
We then compared Howteh 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 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. This then helps them determine if the stock is placed for a bright or bleak future. 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 Howteh Technology is trading on a high P/E or a low P/E, relative to its industry.
Is Howteh Technology Using Its Retained Earnings Effectively?
Howteh Technology has a three-year median payout ratio of 42% (where it is retaining 58% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Howteh Technology is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
Moreover, Howteh 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.
Overall, we feel that Howteh Technology certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won’t completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 4 risks we have identified for Howteh Technology visit our risks dashboard for free.
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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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