Daily Polymer (GTSM:4716) has had a rough three months with its share price down 3.1%. Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company’s key financial indicators. In this article, we decided to focus on Daily Polymer’s ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company’s success at turning shareholder investments into profits.
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 Daily Polymer is:
4.7% = NT$39m ÷ NT$832m (Based on the trailing twelve months to June 2020).
The ‘return’ is the yearly profit. That means that for every NT$1 worth of shareholders’ equity, the company generated NT$0.05 in profit.
What Has ROE Got To Do With 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. 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.
Daily Polymer’s Earnings Growth And 4.7% ROE
At first glance, Daily Polymer’s ROE doesn’t look very promising. A quick further study shows that the company’s ROE doesn’t compare favorably to the industry average of 6.1% either. Therefore, it might not be wrong to say that the five year net income decline of 10% seen by Daily Polymer was probably the result of it having a lower ROE. We reckon that there could also be other factors at play here. Such as – low earnings retention or poor allocation of capital.
As a next step, we compared Daily Polymer’s performance with the industry and found thatDaily Polymer’s performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 0.03% in the same period, which is a slower than the company.
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. Doing so will help them establish if the stock’s future looks promising or ominous. 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 Daily Polymer is trading on a high P/E or a low P/E, relative to its industry.
Is Daily Polymer Using Its Retained Earnings Effectively?
Daily Polymer’s declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 93% (or a retention ratio of 7.2%). The business is only left with a small pool of capital to reinvest – A vicious cycle that doesn’t benefit the company in the long-run. To know the 4 risks we have identified for Daily Polymer visit our risks dashboard for free.
Moreover, Daily Polymer has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.
On the whole, Daily Polymer’s performance is quite a big let-down. The low ROE, combined with the fact that the company is paying out almost if not all, of its profits as dividends, has resulted in the lack or absence of growth in its earnings. Up till now, we’ve only made a short study of the company’s growth data. To gain further insights into Daily Polymer’s past profit growth, check out this visualization of past earnings, revenue and cash flows.
When trading Daily Polymer or any other investment, use the platform considered by many to be the Professional’s Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account.
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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
This post was originally published on *this site*