Most readers would already be aware that Excelsior Capital's (ASX:ECL) stock increased significantly by 34% 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. In this article, we decided to focus on Excelsior Capital's ROE.
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.
Check out our latest analysis for Excelsior Capital
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 Excelsior Capital is:
13% = AU$8.0m ÷ AU$60m (Based on the trailing twelve months to June 2022).
The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.13 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
Excelsior Capital's Earnings Growth And 13% ROE
To begin with, Excelsior Capital seems to have a respectable ROE. Even when compared to the industry average of 13% the company's ROE looks quite decent. This probably goes some way in explaining Excelsior Capital's moderate 15% growth over the past five years amongst other factors.
As a next step, we compared Excelsior Capital'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 20% in the same period.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Excelsior Capital fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Excelsior Capital Efficiently Re-investing Its Profits?
With a three-year median payout ratio of 30% (implying that the company retains 70% of its profits), it seems that Excelsior Capital is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.