World Fitness Services’ (TWSE:2762) stock is up by a considerable 35% over the past three months. We wonder if and what role the company’s financials play in that price change as a company’s long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to World Fitness Services’ 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 simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
See our latest analysis for World Fitness Services
How Is ROE Calculated?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for World Fitness Services is:
12% = NT$417m ÷ NT$3.4b (Based on the trailing twelve months to June 2024).
The ‘return’ refers to a company’s earnings over the last year. That means that for every NT$1 worth of shareholders’ equity, the company generated NT$0.12 in profit.
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.
World Fitness Services’ Earnings Growth And 12% ROE
At first glance, World Fitness Services seems to have a decent ROE. Even so, when compared with the average industry ROE of 16%, we aren’t very excited. That being the case, the significant five-year 45% net income growth reported by World Fitness Services comes as a pleasant surprise. We believe that there might be other aspects that are positively influencing the company’s earnings growth. Such as – high earnings retention or an efficient management in place. Bear in mind, the company does have a respectable ROE. It is just that the industry ROE is higher. So this also does lend some color to the high earnings growth seen by the company.
Next, on comparing with the industry net income growth, we found that World Fitness Services’ growth is quite high when compared to the industry average growth of 20% in the same period, which is great to see.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Has the market priced in the future outlook for 2762? You can find out in our latest intrinsic value infographic research report.
Is World Fitness Services Using Its Retained Earnings Effectively?
World Fitness Services has very a high three-year median payout ratio of 165% suggesting that the company’s shareholders are getting paid from more than just the company’s earnings. In spite of this, the company was able to grow its earnings significantly, as we saw above. Having said that, the high payout ratio is definitely risky and something to keep an eye on.
While World Fitness Services has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.
Summary
Overall, we feel that World Fitness Services certainly does have some positive factors to consider. Namely, its high earnings growth, which was probably achieved due to its respectable ROE. However, the considerably low reinvestment rate does diminish our excitement to a certain extent. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
Valuation is complex, but we’re here to simplify it.
Discover if World Fitness Services might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.
