Chi Hua Fitness Co., Ltd.'s (GTSM:1593) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Chi Hua Fitness (GTSM:1593) has had a great run on the share market with its stock up by a significant 110% over the last three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Chi Hua Fitness' 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Chi Hua Fitness

How Is ROE Calculated?

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 Chi Hua Fitness is:

15% = NT$126m ÷ NT$851m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. One way to conceptualize this is that for each NT$1 of shareholders' capital it has, the company made NT$0.15 in profit.

Why Is ROE Important For Earnings Growth?

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

Chi Hua Fitness' Earnings Growth And 15% ROE

To begin with, Chi Hua Fitness seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 14%. This certainly adds some context to Chi Hua Fitness' moderate 6.5% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Chi Hua Fitness' growth is quite high when compared to the industry average growth of 5.0% 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. 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 Chi Hua Fitness is trading on a high P/E or a low P/E, relative to its industry.

Is Chi Hua Fitness Making Efficient Use Of Its Profits?

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 wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Chi Hua Fitness has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we feel that Chi Hua Fitness certainly does have some positive factors to consider. Namely, its high earnings growth, which was likely due to its high ROE. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining hardly any of its profits. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Chi Hua Fitness' past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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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