Chunghwa Telecom Co., Ltd. (TWSE:2412) Has Fared Decently But Fundamentals Look Uncertain: What Lies Ahead For The Stock?

Most readers would already know that Chunghwa Telecom's (TWSE:2412) stock increased by 2.5% over the past month. However, the company's financials look a bit inconsistent and market outcomes are ultimately driven by long-term fundamentals, meaning that the stock could head in either direction. Specifically, we decided to study Chunghwa Telecom's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Chunghwa Telecom

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Chunghwa Telecom is:

10.0% = NT$38b ÷ NT$377b (Based on the trailing twelve months to June 2024).

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$0.10.

What Is The Relationship Between ROE And 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. 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.

Chunghwa Telecom's Earnings Growth And 10.0% ROE

At first glance, Chunghwa Telecom seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 10.0%. Despite the moderate return on equity, Chunghwa Telecom has posted a net income growth of 2.2% over the past five years. We reckon that a low growth, when returns are moderate could be the result of certain circumstances like low earnings retention or poor allocation of capital.

As a next step, we compared Chunghwa Telecom's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 13% in the same period.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is 2412 worth today? The intrinsic value infographic in our free research report helps visualize whether 2412 is currently mispriced by the market.

Is Chunghwa Telecom Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 99% (or a retention ratio of 1.3%), most of Chunghwa Telecom's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

In addition, Chunghwa Telecom has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 99%. As a result, Chunghwa Telecom's ROE is not expected to change by much either, which we inferred from the analyst estimate of 10% for future ROE.

Summary

On the whole, we feel that the performance shown by Chunghwa Telecom can be open to many interpretations. Despite the high ROE, the company has a disappointing earnings growth number, due to its poor rate of reinvestment into its business. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.