Declining Stock and Solid Fundamentals: Is The Market Wrong About First High-School Education Group Co., Ltd. (NYSE:FHS)?

By
Simply Wall St
Published
December 23, 2021
NYSE:FHS
Source: Shutterstock

First High-School Education Group (NYSE:FHS) has had a rough three months with its share price down 56%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study First High-School Education Group's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for First High-School Education Group

How Do You 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 High-School Education Group is:

30% = CN¥45m ÷ CN¥152m (Based on the trailing twelve months to June 2021).

The 'return' is the profit over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.30.

Why Is ROE Important For 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.

First High-School Education Group's Earnings Growth And 30% ROE

Firstly, we acknowledge that First High-School Education Group has a significantly high ROE. Secondly, even when compared to the industry average of 8.7% the company's ROE is quite impressive. So, the substantial 44% net income growth seen by First High-School Education Group over the past five years isn't overly surprising.

As a next step, we compared First High-School Education Group's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 16%.

past-earnings-growth
NYSE:FHS Past Earnings Growth December 23rd 2021

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 First High-School Education Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is First High-School Education Group Making Efficient Use Of Its Profits?

First High-School Education Group doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Conclusion

In total, we are pretty happy with First High-School Education Group's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. 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.

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