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Most readers would already be aware that Parkson Retail Asia's (SGX:O9E) stock increased significantly by 12% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Parkson Retail Asia'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
See our latest analysis for Parkson Retail Asia
How Do You 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 Parkson Retail Asia is:
62% = S$24m ÷ S$39m (Based on the trailing twelve months to December 2024).
The 'return' is the yearly profit. That means that for every SGD1 worth of shareholders' equity, the company generated SGD0.62 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. 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 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.
Parkson Retail Asia's Earnings Growth And 62% ROE
To begin with, Parkson Retail Asia has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 6.8% also doesn't go unnoticed by us. So, the substantial 56% net income growth seen by Parkson Retail Asia over the past five years isn't overly surprising.
Next, on comparing with the industry net income growth, we found that Parkson Retail Asia's growth is quite high when compared to the industry average growth of 1.9% in the same period, which is great to see.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Parkson Retail Asia's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.