FOCI Fiber Optic Communications’ (GTSM:3363) stock is up by a considerable 26% over the past three months. 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. Specifically, we decided to study FOCI Fiber Optic Communications’ ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. 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 FOCI Fiber Optic Communications is:
5.7% = NT$95m ÷ NT$1.7b (Based on the trailing twelve months to December 2020).
The ‘return’ refers to a company’s earnings over the last year. Another way to think of that is that for every NT$1 worth of equity, the company was able to earn NT$0.06 in profit.
What Is The Relationship Between ROE And 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.
FOCI Fiber Optic Communications’ Earnings Growth And 5.7% ROE
At first glance, FOCI Fiber Optic Communications’ ROE doesn’t look very promising. Next, when compared to the average industry ROE of 9.4%, the company’s ROE leaves us feeling even less enthusiastic. FOCI Fiber Optic Communications was still able to see a decent net income growth of 6.9% over the past five years. We reckon that there could be other factors at play here. Such as – high earnings retention or an efficient management in place.
As a next step, we compared FOCI Fiber Optic Communications’ net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 1.7%.
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 FOCI Fiber Optic Communications fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is FOCI Fiber Optic Communications Making Efficient Use Of Its Profits?
FOCI Fiber Optic Communications has a significant three-year median payout ratio of 71%, meaning that it is left with only 29% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.
Moreover, FOCI Fiber Optic Communications 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.
In total, it does look like FOCI Fiber Optic Communications has some positive aspects to its business. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. Up till now, we’ve only made a short study of the company’s growth data. So it may be worth checking this free detailed graph of FOCI Fiber Optic Communications’ past earnings, as well as revenue and cash flows to get a deeper insight into the company’s performance.
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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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