Is Charter Hall Group's (ASX:CHC) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Most readers would already be aware that Charter Hall Group's (ASX:CHC) stock increased significantly by 21% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Charter Hall Group's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Charter Hall Group

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Charter Hall Group is:

16% = AU$348m ÷ AU$2.1b (Based on the trailing twelve months to June 2020).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.16 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Charter Hall Group's Earnings Growth And 16% ROE

To start with, Charter Hall Group's ROE looks acceptable. Especially when compared to the industry average of 6.6% the company's ROE looks pretty impressive. This certainly adds some context to Charter Hall Group's decent 14% net income growth seen over the past five years.

As a next step, we compared Charter Hall Group's 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 8.5%.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for CHC? You can find out in our latest intrinsic value infographic research report.

Is Charter Hall Group Efficiently Re-investing Its Profits?

Charter Hall Group seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 81%, meaning the company retains only 19% of its income. However, this is typical for REITs as they are often required by law to distribute most of their earnings. In spite of this, the company was able to grow its earnings by a fair bit, as we saw above.

Besides, Charter Hall Group has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 57% over the next three years. Still forecasts suggest that Charter Hall Group's future ROE will drop to 13% even though the the company's payout ratio is expected to decrease. This suggests that there could be other factors could driving the anticipated decline in the company's ROE.

Conclusion

Overall, we are quite pleased with Charter Hall Group's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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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