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Trade Desk (NASDAQ:TTD) has had a great run on the share market with its stock up by a significant 11% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Trade Desk's ROE in this article.
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 Trade Desk
How To Calculate Return On Equity?
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 Trade Desk is:
12% = US$308m ÷ US$2.6b (Based on the trailing twelve months to September 2024).
The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.12 in profit.
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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.
Trade Desk's Earnings Growth And 12% ROE
At first glance, Trade Desk seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 11%. This certainly adds some context to Trade Desk's moderate 6.7% net income growth seen over the past five years.
As a next step, we compared Trade Desk's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 5.1%.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is TTD fairly valued? This infographic on the company's intrinsic value has everything you need to know.