Hi-Clearance Inc.'s (GTSM:1788) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Hi-Clearance's (GTSM:1788) stock is up by a considerable 12% over the past 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 Hi-Clearance'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Hi-Clearance

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 Hi-Clearance is:

16% = NT$309m ÷ NT$1.9b (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. So, this means that for every NT$1 of its shareholder's investments, the company generates a profit of NT$0.16.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Hi-Clearance's Earnings Growth And 16% ROE

At first glance, Hi-Clearance seems to have a decent ROE. Especially when compared to the industry average of 8.1% the company's ROE looks pretty impressive. This probably laid the ground for Hi-Clearance's moderate 5.8% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Hi-Clearance's reported growth was lower than the industry growth of 9.7% in the same period, which is not something we like 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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Hi-Clearance's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hi-Clearance Making Efficient Use Of Its Profits?

Hi-Clearance has a significant three-year median payout ratio of 84%, meaning that it is left with only 16% 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.

Additionally, Hi-Clearance has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

Overall, we feel that Hi-Clearance certainly does have some positive factors to consider. The company has grown its earnings moderately as previously discussed. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be quite low. Up till now, we've only made a short study of the company's growth data. To gain further insights into Hi-Clearance'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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