Is First Hi-tec Enterprise Co., Ltd.'s (GTSM:5439) Latest Stock Performance A Reflection Of Its Financial Health?

First Hi-tec Enterprise (GTSM:5439) has had a great run on the share market with its stock up by a significant 33% over the last 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. In this article, we decided to focus on First Hi-tec Enterprise's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for First Hi-tec Enterprise

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for First Hi-tec Enterprise is:

16% = NT$263m ÷ NT$1.7b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each NT$1 of shareholders' capital it has, the company made NT$0.16 in profit.

What Has ROE Got To Do With 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. 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.

First Hi-tec Enterprise's Earnings Growth And 16% ROE

To start with, First Hi-tec Enterprise's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 11%. This probably laid the ground for First Hi-tec Enterprise's moderate 12% net income growth seen over the past five years.

We then compared First Hi-tec Enterprise's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 9.0% in the same period.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about First Hi-tec Enterprise's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is First Hi-tec Enterprise Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 82% (or a retention ratio of 18%) for First Hi-tec Enterprise suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, First Hi-tec Enterprise 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.

Conclusion

In total, we are pretty happy with First Hi-tec Enterprise'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. So it may be worth checking this free detailed graph of First Hi-tec Enterprise's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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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