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Tai Sin Electric's (SGX:500) stock was mostly flat over the past week. Given that stock prices usually follow the long-term financial performance of the business, we wonder if the company's mixed fundamentals are weighing heavily on the company's share price movements. Particularly, we will be paying attention to Tai Sin Electric's 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. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for Tai Sin Electric
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Tai Sin Electric is:
5.8% = S$12m ÷ S$205m (Based on the trailing twelve months to December 2023).
The 'return' refers to a company's earnings over the last year. That means that for every SGD1 worth of shareholders' equity, the company generated SGD0.06 in profit.
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. 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.
Tai Sin Electric's Earnings Growth And 5.8% ROE
When you first look at it, Tai Sin Electric's ROE doesn't look that attractive. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 7.9% either. Tai Sin Electric was still able to see a decent net income growth of 7.2% over the past five years. We reckon that there could be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
We then compared Tai Sin Electric's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 16% in the same 5-year period, which is a bit concerning.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Tai Sin Electric fairly valued compared to other companies? These 3 valuation measures might help you decide.