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It is hard to get excited after looking at Connexion Mobility's (ASX:CXZ) recent performance, when its stock has declined 10.0% over the past month. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Connexion Mobility's ROE.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.
See our latest analysis for Connexion Mobility
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 Connexion Mobility is:
30% = US$1.9m ÷ US$6.3m (Based on the trailing twelve months to June 2024).
The 'return' is the yearly profit. That means that for every A$1 worth of shareholders' equity, the company generated A$0.30 in profit.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.
Connexion Mobility's Earnings Growth And 30% ROE
Firstly, we acknowledge that Connexion Mobility has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 8.0% which is quite remarkable. This likely paved the way for the modest 10% net income growth seen by Connexion Mobility over the past five years.
Next, on comparing with the industry net income growth, we found that Connexion Mobility's reported growth was lower than the industry growth of 17% over the last few years, which is not something we like to see.
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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Connexion Mobility is trading on a high P/E or a low P/E, relative to its industry.