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Addvalue Technologies' (SGX:A31) stock was mostly flat over the past week. However, its worth giving the company a closer given that its key financial performance indicators aren't particularly bad and long-term financial health is usually what drive market prices. Particularly, we will be paying attention to Addvalue Technologies' 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for Addvalue Technologies
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 Addvalue Technologies is:
16% = US$969k ÷ US$6.2m (Based on the trailing twelve months to September 2024).
The 'return' is the yearly profit. So, this means that for every SGD1 of its shareholder's investments, the company generates a profit of SGD0.16.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.
Addvalue Technologies' Earnings Growth And 16% ROE
At first glance, Addvalue Technologies seems to have a decent ROE. On comparing with the average industry ROE of 7.4% the company's ROE looks pretty remarkable. Despite this, Addvalue Technologies' five year net income growth was quite flat over the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. These include low earnings retention or poor allocation of capital.
As a next step, we compared Addvalue Technologies' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 14% in the same period.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Addvalue Technologies''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.