With its stock down 3.4% over the past three months, it is easy to disregard Hotel Royal Chihpen (GTSM:5704). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Hotel Royal Chihpen's 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.
How To Calculate Return On Equity?
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 Hotel Royal Chihpen is:
15% = NT$79m ÷ NT$511m (Based on the trailing twelve months to September 2020).
The 'return' refers to a company's earnings over the last year. That means that for every NT$1 worth of shareholders' equity, the company generated NT$0.15 in profit.
What Is The Relationship Between ROE And 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 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.
Hotel Royal Chihpen's Earnings Growth And 15% ROE
At first glance, Hotel Royal Chihpen seems to have a decent ROE. On comparing with the average industry ROE of 7.1% the company's ROE looks pretty remarkable. This certainly adds some context to Hotel Royal Chihpen's decent 13% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that Hotel Royal Chihpen's growth is quite high when compared to the industry average growth of 0.8% 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. Is Hotel Royal Chihpen fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Hotel Royal Chihpen Efficiently Re-investing Its Profits?
Hotel Royal Chihpen has a significant three-year median payout ratio of 79%, meaning that it is left with only 21% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.
Besides, Hotel Royal Chihpen has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.
Overall, we are quite pleased with Hotel Royal Chihpen's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. Up till now, we've only made a short study of the company's growth data. To gain further insights into Hotel Royal Chihpen's 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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