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EDU Holdings (ASX:EDU) has had a great run on the share market with its stock up by a significant 100% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study EDU Holdings' 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for EDU Holdings
How Do You 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 EDU Holdings is:
21% = AU$2.6m ÷ AU$12m (Based on the trailing twelve months to December 2024).
The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.21 in profit.
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. 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 EDU Holdings' Earnings Growth And 21% ROE
At first glance, EDU Holdings seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 6.7%. This probably laid the ground for EDU Holdings' moderate 13% net income growth seen over the past five years.
As a next step, we compared EDU Holdings' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 20% 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). This then helps them determine if the stock is placed for a bright or bleak future. Is EDU Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.