In This Article:
Objective's (ASX:OCL) stock up by 4.6% over the past week. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. In this article, we decided to focus on Objective's ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Objective
How To 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 Objective is:
35% = AU$27m ÷ AU$77m (Based on the trailing twelve months to December 2023).
The 'return' is the profit over the last twelve months. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.35.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
Objective's Earnings Growth And 35% ROE
First thing first, we like that Objective has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 9.5% also doesn't go unnoticed by us. Under the circumstances, Objective's considerable five year net income growth of 23% was to be expected.
Next, on comparing Objective's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 25% over the last few years.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Objective fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Objective Making Efficient Use Of Its Profits?
The three-year median payout ratio for Objective is 49%, which is moderately low. The company is retaining the remaining 51%. So it seems that Objective is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.