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With its stock down 9.1% over the past three months, it is easy to disregard HiTech Group Australia (ASX:HIT). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to HiTech Group Australia's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.
Check out our latest analysis for HiTech Group Australia
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for HiTech Group Australia is:
56% = AU$4.0m ÷ AU$7.0m (Based on the trailing twelve months to December 2021).
The 'return' is the income the business earned over the last year. That means that for every A$1 worth of shareholders' equity, the company generated A$0.56 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. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
A Side By Side comparison of HiTech Group Australia's Earnings Growth And 56% ROE
Firstly, we acknowledge that HiTech Group Australia has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 12% also doesn't go unnoticed by us. This probably laid the groundwork for HiTech Group Australia's moderate 11% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that HiTech Group Australia's reported growth was lower than the industry growth of 22% in the same period, which is not something we like to see.
Earnings growth is an important metric to consider when valuing a stock. 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 HiTech Group Australia's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.