Is GME Group Holdings Limited's (HKG:8188) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Most readers would already be aware that GME Group Holdings' (HKG:8188) stock increased significantly by 15% 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 GME Group Holdings' ROE in this article.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for GME Group Holdings

How Is ROE Calculated?

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 GME Group Holdings is:

47% = HK$61m ÷ HK$131m (Based on the trailing twelve months to December 2023).

The 'return' refers to a company's earnings over the last year. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.47 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

GME Group Holdings' Earnings Growth And 47% ROE

Firstly, we acknowledge that GME Group Holdings has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 6.5% which is quite remarkable. So, the substantial 63% net income growth seen by GME Group Holdings over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that GME Group Holdings' growth is quite high when compared to the industry average growth of 1.4% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about GME Group Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is GME Group Holdings Using Its Retained Earnings Effectively?

The three-year median payout ratio for GME Group Holdings is 40%, which is moderately low. The company is retaining the remaining 60%. So it seems that GME Group Holdings is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Moreover, GME Group Holdings is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend.

Summary

On the whole, we feel that GME Group Holdings' performance has been quite good. 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. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. Our risks dashboard would have the 5 risks we have identified for GME Group Holdings.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com