Is Gatekeeper Systems Inc.'s (CVE:GSI) Latest Stock Performance A Reflection Of Its Financial Health?

Gatekeeper Systems’ ROE today.” data-reactid=”28″>Gatekeeper Systems’ (CVE:GSI) stock is up by a considerable 314% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Gatekeeper Systems’ 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. Put another way, it reveals the company’s success at turning shareholder investments into profits.

See our latest analysis for Gatekeeper Systems ” data-reactid=”30″> See our latest analysis for Gatekeeper Systems

How Is ROE Calculated?

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for Gatekeeper Systems is:

18% = CA$1.5m ÷ CA$8.5m (Based on the trailing twelve months to May 2020).

The ‘return’ is the profit over the last twelve months. That means that for every CA$1 worth of shareholders’ equity, the company generated CA$0.18 in profit.

Why Is ROE Important For Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. 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 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.

Gatekeeper Systems’ Earnings Growth And 18% ROE

At first glance, Gatekeeper Systems seems to have a decent ROE. Even when compared to the industry average of 17% the company’s ROE looks quite decent. Consequently, this likely laid the ground for the decent growth of 15% seen over the past five years by Gatekeeper Systems.

As a next step, we compared Gatekeeper Systems’ net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 15% in the same period.

More

check if Gatekeeper Systems is trading on a high P/E or a low P/E, relative to its industry.” data-reactid=”58″>The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. 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 Gatekeeper Systems is trading on a high P/E or a low P/E, relative to its industry.

Is Gatekeeper Systems Using Its Retained Earnings Effectively?

Gatekeeper Systems doesn’t pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the decent earnings growth number that we discussed above.

Summary

on our platform here.” data-reactid=”62″>In total, we are pretty happy with Gatekeeper Systems’ performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let’s not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. You can see the 3 risks we have identified for Gatekeeper Systems by visiting our risks dashboard for free on our platform here.