World Fitness Services (TWSE:2762) stock has increased by a significant 35% over the past three months. Since a company’s long-term fundamentals typically drive market outcomes, we wonder what role, if any, a company’s financials play in price movements. I think so. In particular, I would like to pay attention to World Fitness Services’ ROE today.
Return on equity or ROE is a key measure used to evaluate how efficiently a company’s management is utilizing the company’s capital. More simply, it measures a company’s profitability in relation to shareholder equity.
Check out our latest analysis for World Fitness Services.
How is ROE calculated?
The formula for calculating return on equity is as follows:
Return on equity = Net income (from continuing operations) ÷ Shareholders’ equity
So, based on the above formula, World Fitness Services’ ROE is:
12% = NT$417 million ÷ NT$3.4 billion (based on trailing twelve months to June 2024).
“Return” refers to a company’s earnings over the past year. So for every NT$1 of shareholders’ equity, the company generated NT$0.12 in profit.
Why is ROE important for profit growth?
So far, we have learned that ROE is a measure of a company’s profitability. We are then able to evaluate a company’s future ability to generate profits based on how much of its profits it chooses to reinvest or “retain.” Assuming all else is equal, companies with both higher return on equity and higher profit retention typically have higher growth rates when compared to companies that don’t have the same characteristics.
World Fitness Services Revenue Growth and ROE 12%
At first glance, World Fitness Services appears to have a decent ROE. Still, it’s not very encouraging when compared to the industry average ROE of 16%. If so, you’ll be pleasantly surprised by the impressive 45% increase in net profit over five years that World Fitness Services reported. We believe there may be other aspects that are positively impacting the company’s earnings growth. For example: – Maintaining high profits and efficient management. Keep in mind, the company has a respectable ROE. It’s just that the industry’s ROE is high. Therefore, this also gives some color to the company’s high revenue growth.
Next, if we compare it to the industry’s net income growth, we find that World Fitness Services’ growth is quite high when compared to the industry average growth of 20% over the same period, which is great.
TWSE:2762 Historical Revenue Growth Rate October 29, 2024
The foundations that give a company value have a lot to do with its revenue growth. It’s important for investors to know whether the market is pricing in a company’s expected earnings growth (or decline). That way, you’ll know if the stock is headed for clear blue waters or if a swamp awaits. Is the market factoring in 2762’s future prospects? Find out in our latest Intrinsic Value infographic research report.
Is World Fitness Services effectively utilizing its retained earnings?
World Fitness Services’ three-year median payout ratio is quite high at 165%, suggesting that its shareholders are being compensated by more than just the company’s earnings. Nevertheless, as we saw above, the company was able to significantly grow its revenue. Having said that, there are definitely risks with a high payout ratio, and you should be careful.
World Fitness Services has been growing its earnings, but it only recently started paying a dividend. This likely means that the company has decided to impress new and existing shareholders with its dividend.
summary
Overall, we feel that World Fitness Services certainly has some positive factors to consider. That’s a high earnings growth rate, which is likely achieved because of its strong ROE. However, our excitement is dampened to some extent by the fairly low reinvestment rate. Having said that, a review of the latest analyst forecasts indicates that the company’s future revenue growth is expected to slow. If you want to know the latest analyst forecasts for the company, check out this visualization of analyst forecasts for the company.
Evaluation is complex, but we will simplify it here.
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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
