It is hard to get excited after looking at Lifestyle Global Enterprise’s (GTSM:8066) recent performance, when its stock has declined 12% over the past month. However, the company’s fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Lifestyle Global Enterprise’s ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. Put another way, it reveals the company’s success at turning shareholder investments into profits.

Check out our latest analysis for Lifestyle Global Enterprise

How Do You Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for Lifestyle Global Enterprise is:

19% = NT$143m ÷ NT$739m (Based on the trailing twelve months to September 2020).

The ‘return’ is the yearly profit. One way to conceptualize this is that for each NT$1 of shareholders’ capital it has, the company made NT$0.19 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. 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.

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A Side By Side comparison of Lifestyle Global Enterprise’s Earnings Growth And 19% ROE

To start with, Lifestyle Global Enterprise’s ROE looks acceptable. Especially when compared to the industry average of 13% the company’s ROE looks pretty impressive. For this reason, Lifestyle Global Enterprise’s five year net income decline of 3.6% raises the question as to why the high ROE didn’t translate into earnings growth. Based on this, we feel that there might be other reasons which haven’t been discussed so far in this article that could be hampering the company’s growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

Next, on comparing with the industry net income growth, we found that Lifestyle Global Enterprise’s earnings seems to be shrinking at a similar rate as the industry which shrunk at a rate of a rate of 3.6% in the same period.

past-earnings-growth

GTSM:8066 Past Earnings Growth January 21st 2021

Earnings growth is a huge factor in stock valuation. 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 Lifestyle Global Enterprise’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Lifestyle Global Enterprise Using Its Retained Earnings Effectively?

Lifestyle Global Enterprise’s declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 79% (or a retention ratio of 21%). The business is only left with a small pool of capital to reinvest – A vicious cycle that doesn’t benefit the company in the long-run. To know the 5 risks we have identified for Lifestyle Global Enterprise visit our risks dashboard for free.

Additionally, Lifestyle Global Enterprise has paid dividends over a period of six years, which means that the company’s management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings.

Conclusion

Overall, we feel that Lifestyle Global Enterprise certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. Up till now, we’ve only made a short study of the company’s growth data. You can do your own research on Lifestyle Global Enterprise and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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This article by Simply Wall St is general in nature. 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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