Is Holy Stone Enterprise Co.,Ltd.'s (TPE:3026) Latest Stock Performance Being Led By Its Strong Fundamentals?

Holy Stone EnterpriseLtd's (TPE:3026) stock is up by 7.5% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Holy Stone EnterpriseLtd'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Holy Stone EnterpriseLtd

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 Holy Stone EnterpriseLtd is:

9.1% = NT$868m ÷ NT$9.5b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each NT$1 of shareholders' capital it has, the company made NT$0.09 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Holy Stone EnterpriseLtd's Earnings Growth And 9.1% ROE

To start with, Holy Stone EnterpriseLtd's ROE looks acceptable. Even when compared to the industry average of 9.9% the company's ROE looks quite decent. This probably goes some way in explaining Holy Stone EnterpriseLtd's moderate 19% growth over the past five years amongst other factors.

Next, on comparing with the industry net income growth, we found that Holy Stone EnterpriseLtd'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 an important metric to consider when valuing a stock. 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. If you're wondering about Holy Stone EnterpriseLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Holy Stone EnterpriseLtd Efficiently Re-investing Its Profits?

While Holy Stone EnterpriseLtd has a three-year median payout ratio of 76% (which means it retains 24% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Moreover, Holy Stone EnterpriseLtd 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.

Conclusion

In total, we are pretty happy with Holy Stone EnterpriseLtd'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. 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 Holy Stone EnterpriseLtd'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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