PropNex (SGX:OYY) has had a rough week with its share price down 2.5%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to PropNex's ROE today.

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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for PropNex

How Is ROE Calculated?

Return on equity 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 PropNex is:

52% = S$65m ÷ S$126m (Based on the trailing twelve months to December 2022).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each SGD1 of shareholders' capital it has, the company made SGD0.52 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

A Side By Side comparison of PropNex's Earnings Growth And 52% ROE

Firstly, we acknowledge that PropNex has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 5.5% which is quite remarkable. Under the circumstances, PropNex's considerable five year net income growth of 31% was to be expected.

Next, on comparing with the industry net income growth, we found that the growth figure reported by PropNex compares quite favourably to the industry average, which shows a decline of 3.3% over the last few years.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is PropNex fairly valued compared to other companies? These 3 valuation measures might help you decide.