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Aztech Global (SGX:8AZ) has had a rough month with its share price down 26%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Aztech Global's ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
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How Is ROE Calculated?
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 Aztech Global is:
17% = S$56m ÷ S$339m (Based on the trailing twelve months to March 2025).
The 'return' is the yearly profit. So, this means that for every SGD1 of its shareholder's investments, the company generates a profit of SGD0.17.
See our latest analysis for Aztech Global
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
A Side By Side comparison of Aztech Global's Earnings Growth And 17% ROE
To begin with, Aztech Global seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 8.5%. Probably as a result of this, Aztech Global was able to see a decent growth of 7.0% over the last five years.
When you consider the fact that the industry earnings have shrunk at a rate of 4.2% in the same 5-year 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. This then helps them determine if the stock is placed for a bright or bleak future. 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 Aztech Global is trading on a high P/E or a low P/E, relative to its industry.
