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It is easy to overlook Sietel's (ASX:SSL) given its unimpressive and roughly flat price performance over the past month. We decided to study the company's financials, which appear to be inconsistent, to assess what this could mean for future share prices as markets tend to be aligned with a company's long-term fundamentals. Specifically, we decided to study Sietel's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for Sietel
How Is ROE Calculated?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Sietel is:
2.8% = AU$2.4m ÷ AU$86m (Based on the trailing twelve months to September 2024).
The 'return' is the profit over the last twelve months. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.03 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 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.
Sietel's Earnings Growth And 2.8% ROE
It is quite clear that Sietel's ROE is rather low. Even when compared to the industry average of 6.1%, the ROE figure is pretty disappointing. As a result, Sietel's flat earnings over the past five years doesn't come as a surprise given its lower ROE.
As a next step, we compared Sietel's net income growth with the industry and discovered that the industry saw an average growth of 11% in the same period.
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. Is Sietel fairly valued compared to other companies? These 3 valuation measures might help you decide.