Giantec Semiconductor's (SHSE:688123) stock is up by a considerable 15% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Giantec Semiconductor's 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.
How To Calculate Return On Equity?
Return on equity 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 Giantec Semiconductor is:
5.2% = CN¥99m ÷ CN¥1.9b (Based on the trailing twelve months to December 2023).
The 'return' is the yearly profit. That means that for every CN¥1 worth of shareholders' equity, the company generated CN¥0.05 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.
Giantec Semiconductor's Earnings Growth And 5.2% ROE
On the face of it, Giantec Semiconductor's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.2%. Moreover, we are quite pleased to see that Giantec Semiconductor's net income grew significantly at a rate of 22% over the last five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
Next, on comparing Giantec Semiconductor's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 26% over the last few years.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Giantec Semiconductor fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Giantec Semiconductor Making Efficient Use Of Its Profits?
The three-year median payout ratio for Giantec Semiconductor is 30%, which is moderately low. The company is retaining the remaining 70%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Giantec Semiconductor is reinvesting its earnings efficiently.
Besides, Giantec Semiconductor has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders.
Summary
Overall, we feel that Giantec Semiconductor certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. 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.