Is First Hi-tec Enterprise Co., Ltd.'s (GTSM:5439) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

First Hi-tec Enterprise's (GTSM:5439) stock is up by a considerable 14% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study First Hi-tec Enterprise's 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.

See our latest analysis for First Hi-tec Enterprise

How Do You Calculate Return On Equity?

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 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. That means that for every NT$1 worth of shareholders' equity, the company generated NT$0.16 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. 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.

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

To begin with, First Hi-tec Enterprise seems to have a respectable ROE. On comparing with the average industry ROE of 9.9% the company's ROE looks pretty remarkable. Probably as a result of this, First Hi-tec Enterprise was able to see a decent growth of 12% over the last five years.

Next, on comparing with the industry net income growth, we found that First Hi-tec Enterprise's growth is quite high when compared to the industry average growth of 9.2% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. 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 First Hi-tec Enterprise is trading on a high P/E or a low P/E, relative 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.

Moreover, First Hi-tec Enterprise is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Summary

On the whole, we feel that First Hi-tec Enterprise's performance has been quite good. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on First Hi-tec Enterprise and see how it has performed in the past by looking at this FREE detailed graph 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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