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NetLink NBN Trust's (SGX:CJLU) stock was mostly flat over the past week. However, its financials look weak which could potentially mean that its stock could show weakness in the future given that stock performances are usually attached to a company's financial health in the long-term. Specifically, we decided to study NetLink NBN Trust's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for NetLink NBN Trust
How To Calculate Return On Equity?
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 NetLink NBN Trust is:
3.8% = S$92m ÷ S$2.5b (Based on the trailing twelve months to December 2024).
The 'return' is the amount earned after tax over the last twelve months. That means that for every SGD1 worth of shareholders' equity, the company generated SGD0.04 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. 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 NetLink NBN Trust's Earnings Growth And 3.8% ROE
It is hard to argue that NetLink NBN Trust's ROE is much good in and of itself. Even compared to the average industry ROE of 9.9%, the company's ROE is quite dismal. However, the moderate 5.3% net income growth seen by NetLink NBN Trust over the past five years is definitely a positive. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.
As a next step, we compared NetLink NBN Trust's 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 a huge factor in stock valuation. 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. Has the market priced in the future outlook for CJLU? You can find out in our latest intrinsic value infographic research report.