Is Chunghwa Telecom Co., Ltd.'s (TWSE:2412) Recent Performance Market's Way Of Responding to Its Mixed Financials?

Chunghwa Telecom's (TWSE:2412) stock was mostly flat over the past week. Looking at its differing financials, we wonder if the market is focusing more on the company's negatives than on the positives resulting in the stock's drab performance. Specifically, we decided to study Chunghwa Telecom's ROE in this article.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Chunghwa Telecom

How Do You Calculate Return On Equity?

ROE 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 Chunghwa Telecom is:

9.7% = NT$38b ÷ NT$387b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. That means that for every NT$1 worth of shareholders' equity, the company generated NT$0.10 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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Chunghwa Telecom's Earnings Growth And 9.7% ROE

To start with, Chunghwa Telecom's ROE looks acceptable. Even when compared to the industry average of 8.2% the company's ROE looks quite decent. Despite the moderate return on equity, Chunghwa Telecom has posted a net income growth of 2.4% over the past five years. A few likely reasons that could be keeping earnings growth low are - the company has a high payout ratio or the business has allocated capital poorly, for instance.

We then compared Chunghwa Telecom's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 12% in the same 5-year period, which is a bit concerning.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is 2412 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Chunghwa Telecom Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 99% (or a retention ratio of 0.7%), most of Chunghwa Telecom's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Moreover, Chunghwa Telecom has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings 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%. Accordingly, forecasts suggest that Chunghwa Telecom's future ROE will be 10% which is again, similar to the current 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. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.