Saturday, March 2

Is Globetronics Technology Bhd.’s (KLSE:GTRONIC) Stock Price Struggling As A Result Of Its Mixed Financials?

Globetronics Technology Bhd (KLSE:GTRONIC) has had a rough month with its share price down 4.8%. It seems that the market might have completely ignored the positive aspects of the company’s fundamentals and decided to weigh-in more on the negative aspects. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company’s financial performance. Specifically, we decided to study Globetronics Technology Bhd’s ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.

Check out our latest analysis for Globetronics Technology Bhd

How Is ROE Calculated?

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 Globetronics Technology Bhd is:

11% = RM32m ÷ RM304m (Based on the trailing twelve months to September 2023).

The ‘return’ is the profit over the last twelve months. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.11 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. 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 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 Globetronics Technology Bhd’s Earnings Growth And 11% ROE

When you first look at it, Globetronics Technology Bhd’s ROE doesn’t look that attractive. Yet, a closer study shows that the company’s ROE is similar to the industry average of 11%. Having said that, Globetronics Technology Bhd’s five year net income decline rate was 9.1%. Remember, the company’s ROE is a bit low to begin with. So that’s what might be causing earnings growth to shrink.

So, as a next step, we compared Globetronics Technology Bhd’s performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 19% over the last few years.

past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you’re wondering about Globetronics Technology Bhd’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Globetronics Technology Bhd Using Its Retained Earnings Effectively?

In spite of a normal three-year median payout ratio of 39% (that is, a retention ratio of 61%), the fact that Globetronics Technology Bhd’s earnings have shrunk is quite puzzling. So there could be some other explanations in that regard. For instance, the company’s business may be deteriorating.

In addition, Globetronics Technology Bhd has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Looking at the current analyst consensus data, we can see that the company’s future payout ratio is expected to rise to 81% over the next three years. However, Globetronics Technology Bhd’s future ROE is expected to rise to 15% despite the expected increase in the company’s payout ratio. We infer that there could be other factors that could be driving the anticipated growth in the company’s ROE.

Summary

In total, we’re a bit ambivalent about Globetronics Technology Bhd’s performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company’s earnings growth rate. 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.

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

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.



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