Will Weakness in GreenTree Hospitality Group Ltd.'s (NYSE:GHG) Stock Prove Temporary Given Strong Fundamentals?
It is hard to get excited after looking at GreenTree Hospitality Group's (NYSE:GHG) recent performance, when its stock has declined 6.1% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to GreenTree Hospitality Group's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
View our latest analysis for GreenTree Hospitality 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 GreenTree Hospitality Group is:
14% = CN¥325m ÷ CN¥2.3b (Based on the trailing twelve months to March 2021).
The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.14 in profit.
What Has ROE Got To Do With 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
GreenTree Hospitality Group's Earnings Growth And 14% ROE
At first glance, GreenTree Hospitality Group seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 14%. Given the circumstances, we can't help but wonder why GreenTree Hospitality Group saw little to no growth in the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
When you consider the fact that the industry earnings have shrunk at a rate of 8.4% in the same period, the company's net income growth is pretty remarkable.
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 GHG fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is GreenTree Hospitality Group Making Efficient Use Of Its Profits?
The high three-year median payout ratio of 53% (meaning, the company retains only 47% of profits) for GreenTree Hospitality Group suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.
Moreover, GreenTree Hospitality Group has been paying dividends for three years, which is a considerable amount of time, 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 is expected to drop to 19% over the next three years. The fact that the company's ROE is expected to rise to 22% over the same period is explained by the drop in the payout ratio.
Conclusion
On the whole, we feel that GreenTree Hospitality Group's performance has been quite good. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.
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.
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