Charter Hall Groups (ASX: CHC) stock has risen: Do strong finances control the market?

Charter Hall Groups (ASX: CHC) stock has risen 4.2% over the last month. Since the market usually pays for a company’s financial health in the long run, we decided to examine the company’s fundamentals to see if they could affect the market. Specifically, we decided to study Charter Hall Group’s ROE in this article.

ROE or return on equity is a useful tool for assessing how effectively a company can generate return on the investment it has received from its shareholders. In short, it is used to assess the profitability of a company in relation to its equity.

See our latest analysis for the Charter Hall Group

How to calculate return on equity?

That formula for return on equity is:

Return on equity = Net profit (from continuing operations) ÷ Equity

So based on the above formula, ROE for Charter Hall Group is:

16% = AU $ 348m ÷ AU $ 2.1b (Based on the subsequent twelve months to June 2020).

‘Return’ refers to a company’s earnings over the past year. This means that for every A $ 1 worth of equity, the company generated A $ 0.16 in profit.

What is the relationship between ROE and earnings growth?

We have already established that ROE acts as an effective profit-generating gauge for a company’s future earnings. Based on how much of its profits the company chooses to reinvest or “keep”, we are then able to evaluate a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profits, the higher the growth of a company compared to companies that do not necessarily have these characteristics.

Charter Hall Group’s earnings growth and 16% ROE

At first glance, Charter Hall Group seems to have a decent ROE. Especially compared to the industry average of 6.6%, the company’s ROE looks quite impressive. This certainly adds some coherence to the Charter Hall Group’s decent net income growth of 14% over the last five years.

Next, when we compared with the industry’s net income growth, we found that Charter Hall Group’s growth is quite high compared to the industry’s average growth of 5.5% in the same period, which is nice to see.

past-earnings-growth

Earnings growth is a huge factor in the valuation of stocks. It is important for an investor to know if the market has priced the company’s expected earnings growth (or decline). This then helps them determine if the stock is placed in a bright or gloomy future. What is CHC worth today? That inherent value infographic in our free research report helps visualize whether CHC is currently incorrectly priced by the market.

Does Charter Hall Group effectively invest its profits?

Charter Hall Group appears to pay out most of its income as dividends, judging by its three-year median payout ratio of 81%, which means that the company retains only 19% of its income. However, this is typical of REITs, as it is often required by law to distribute most of their earnings. Despite this, the company was able to increase its earnings by a bit as we saw above.

In addition, the Charter Hall Group has paid dividends for at least ten years or more. This shows that the company is required to share profits with its shareholders. Our latest analyst data shows that the future payout ratio for the company is expected to fall to 60% over the next three years. However, it is not expected that the company’s ROE will change much despite the lower expected payout ratio.

Conclusion

Overall, we are quite pleased with the Charter Hall Group’s performance. We are particularly impressed with the significant revenue growth that the company posted, which was probably backed by its high ROE. While the company pays out most of its earnings as dividends, it has been able to increase its earnings despite that, so that is probably a good sign. That said, we were studying the current analyst estimates to be concerned that while the company has grown its earnings in the past, analysts expect its earnings to decline in the future. To know more about the company’s future earnings growth forecasts, look at this for free reports on analyst forecasts for the company to find out more.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any shares and does not take into account your goals or your financial situation. We strive to provide you with long-term focused analysis driven by basic data. Please note that our analysis may not include the latest price sensitive company announcements or qualitative material. Simply Wall St has no position in the mentioned stocks.

Do you have feedback on this article? Worried about the content? Contact us with us directly. Alternatively, you can email the editorial team (at) simplywallst.com.

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