Chi Hua Fitness (GTSM: 1593) has had a good run in the stock market. In the past three months, the stock rose significantly by 110%. As most will know, fundamentals tend to dictate market price movements over the long term. So we decided to examine the company’s key financial indicators today to see if they are playing a role in recent price action. In particular, today we will be paying attention to the ROE of Chi Hua Fitness.
Return on Equity, or ROE, is an important factor for a shareholder to consider as it indicates how effectively their capital is being reinvested. Simply put, it’s used to evaluate a company’s profitability in relation to its equity.
Check out our latest analysis for Chi Hua Fitness
How is the ROE calculated?
The ROE can be calculated using the following formula:
Return on Equity = Net Income (from continuing operations) ÷ Equity
So based on the above formula, the ROE for Chi Hua Fitness is:
15% = NT $ 126 million ÷ NT $ 851 million (based on the last twelve months through September 2020).
The “return” is the annual profit. One way to conceptualize this is for the company to make a profit of NT $ 0.15 for every NT $ 1 shareholder equity.
Why is ROE important to earnings growth?
So far we have learned that the ROE is a measure of a company’s profitability. We now need to evaluate how much profit the company is reinvesting or “keeping” for future growth to get an idea of the company’s growth potential. In general, all other things being equal, companies with high ROE and profit sharing will have a higher rate of growth than companies that do not share these characteristics.
Chi Hua Fitness’ earnings growth and 15% ROE
At first, Chi Hua Fitness appears to have a respectable ROE. In addition, the company’s ROE is the industry average of 14%. This certainly contributes to Chi Hua Fitness’s modest 6.5% growth in net income over the past five years.
Compared to the industry net income growth, we found that Chi Hua Fitness growth is quite high compared to the industry’s average growth of 5.0% over the same period, which can be seen very clearly.
GTSM: 1593 past earnings growth February 22, 2021
GTSM: 1593 past earnings growth February 22, 2021The foundation of a company’s value creation is largely tied to profit growth. It is important for an investor to know if the market has priced in the company’s expected earnings growth (or decline). That way, they can determine if the future of the stock is promising or threatening. A good indicator of expected earnings growth is P / E ratio, which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check if Chi Hua Fitness is trading at high or low P / E ratios compared to its industry.
Is Chi Hua Fitness Using Its Profits Efficiently?
The high three-year median payout ratio of 92% (or a retention ratio of 8.2%) for Chi Hua Fitness suggests that the company’s growth hasn’t really been hampered, even though it returned most of its revenues to its shareholders.
Additionally, Chi Hua Fitness has been paying dividends for at least ten years or more. This shows that the company has an obligation to share profits with its shareholders.
Conclusion
Overall, we think that Chi Hua Fitness certainly has some positive factors to consider. The high earnings growth likely due to the high ROE. However, investors could have benefited even more from the high return on investment if the company had reinvested more of its earnings. As mentioned earlier, the company hardly keeps a profit. So far, we’ve only touched the surface of corporate performance in the past by looking at the fundamentals of the company. For more insight into Chi Hua Fitness’s past earnings growth, check out this past earnings, sales, and cash flows visualization.
Funded
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This article from Simply Wall St is of a general nature. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. We want to provide you with a long-term, focused analysis based on fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or quality materials. Simply Wall St has no position in the stocks mentioned.
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