Most readers would already be aware that Kingsland Global's (ASX:KLO) stock increased significantly by 25% over the past week. 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 Kingsland Global's ROE.
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.
See our latest analysis for Kingsland Global
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 Kingsland Global is:
16% = S$4.9m ÷ S$30m (Based on the trailing twelve months to September 2019).
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$0.16 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learnt that ROE is a measure of a company's profitability. 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 Kingsland Global's Earnings Growth And 16% ROE
To begin with, Kingsland Global seems to have a respectable ROE. Especially when compared to the industry average of 6.3% the company's ROE looks pretty impressive. Probably as a result of this, Kingsland Global was able to see a decent growth of 7.2% over the last five years.
When you consider the fact that the industry earnings have shrunk at a rate of 0.7% in the same period, the company's net income growth is pretty remarkable.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Kingsland Global fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Kingsland Global Using Its Retained Earnings Effectively?
Given that Kingsland Global doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.