In This Article:
Duty Free International's (SGX:5SO) stock is up by a considerable 17% over the past week. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. In this article, we decided to focus on Duty Free International'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Duty Free International
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 Duty Free International is:
3.1% = RM11m ÷ RM348m (Based on the trailing twelve months to May 2024).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each SGD1 of shareholders' capital it has, the company made SGD0.03 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 Duty Free International's Earnings Growth And 3.1% ROE
It is quite clear that Duty Free International's ROE is rather low. Not just that, even compared to the industry average of 16%, the company's ROE is entirely unremarkable. Accordingly, Duty Free International's low net income growth of 2.9% over the past five years can possibly be explained by the low ROE amongst other factors.
As a next step, we compared Duty Free International'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 21% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Duty Free International's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.