Rex Trueform Group's (JSE:RTN) stock is up by 8.6% over the past three months. However, we decided to study the company's mixed-bag of fundamentals to assess what this could mean for future share prices, as stock prices tend to be aligned with a company's long-term financial performance. In this article, we decided to focus on Rex Trueform Group'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for Rex Trueform Group
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 Rex Trueform Group is:
15% = R51m ÷ R341m (Based on the trailing twelve months to June 2022).
The 'return' is the yearly profit. So, this means that for every ZAR1 of its shareholder's investments, the company generates a profit of ZAR0.15.
What Is The Relationship Between ROE And 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 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.
Rex Trueform Group's Earnings Growth And 15% ROE
At first glance, Rex Trueform Group's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 17%, we may spare it some thought. But Rex Trueform Group saw a five year net income decline of 3.6% over the past five years. Remember, the company's ROE is a bit low to begin with. Therefore, the decline in earnings could also be the result of this.
However, when we compared Rex Trueform Group's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 3.6% in the same period. This is quite worrisome.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Rex Trueform Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.