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Are Poor Financial Prospects Dragging Down Axcen Photonics Corporation (GTSM:6530 Stock? – Simply Wall St


Axcen Photonics (GTSM:6530) has had a rough three months with its share price down 9.2%. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Particularly, we will be paying attention to Axcen Photonics’ ROE today.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Axcen Photonics

How To Calculate Return On Equity?

ROE 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 Axcen Photonics is:

6.2% = NT$27m ÷ NT$434m (Based on the trailing twelve months to June 2020).

The ‘return’ is the profit over the last twelve months. So, this means that for every NT$1 of its shareholder’s investments, the company generates a profit of NT$0.06.

Why Is ROE Important For 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. 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.

A Side By Side comparison of Axcen Photonics’ Earnings Growth And 6.2% ROE

At first glance, Axcen Photonics’ 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 9.1% either. Therefore, it might not be wrong to say that the five year net income decline of 12% seen by Axcen Photonics was probably the result of it having a lower ROE. We believe that there also might be other aspects that are negatively influencing the company’s earnings prospects. For example, it is possible that the business has allocated capital poorly or that the company has a very high payout ratio.

However, when we compared Axcen Photonics’ growth with the industry we found that while the company’s earnings have been shrinking, the industry has seen an earnings growth of 1.0% in the same period. This is quite worrisome.

past-earnings-growth
GTSM:6530 Past Earnings Growth September 28th 2020

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. Is Axcen Photonics fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Axcen Photonics Efficiently Re-investing Its Profits?

With a three-year median payout ratio as high as 131%,Axcen Photonics’ shrinking earnings don’t come as a surprise as the company is paying a dividend which is beyond its means. Its usually very hard to sustain dividend payments that are higher than reported profits. You can see the 4 risks we have identified for Axcen Photonics by visiting our risks dashboard for free on our platform here.

In addition, Axcen Photonics has been paying dividends over a period of four years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Axcen Photonics. 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. So it may be worth checking this free detailed graph of Axcen Photonics’ 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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