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Most readers would already be aware that Credit Bureau Asia's (SGX:TCU) stock increased significantly by 35% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Credit Bureau Asia'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
See our latest analysis for Credit Bureau Asia
How Is ROE Calculated?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Credit Bureau Asia is:
35% = S$25m ÷ S$71m (Based on the trailing twelve months to June 2024).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every SGD1 worth of equity, the company was able to earn SGD0.35 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. 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.
A Side By Side comparison of Credit Bureau Asia's Earnings Growth And 35% ROE
First thing first, we like that Credit Bureau Asia has an impressive ROE. Secondly, even when compared to the industry average of 15% the company's ROE is quite impressive. This likely paved the way for the modest 10% net income growth seen by Credit Bureau Asia over the past five years.
Next, on comparing Credit Bureau Asia's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 10% over the last few years.
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. 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 Credit Bureau Asia is trading on a high P/E or a low P/E, relative to its industry.