A-Sonic Aerospace (SGX:BTJ) has had a rough month with its share price down 5.8%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to A-Sonic Aerospace's ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for A-Sonic Aerospace
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 A-Sonic Aerospace is:
12% = US$5.5m ÷ US$46m (Based on the trailing twelve months to December 2022).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every SGD1 of its shareholder's investments, the company generates a profit of SGD0.12.
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. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
A-Sonic Aerospace's Earnings Growth And 12% ROE
To begin with, A-Sonic Aerospace seems to have a respectable ROE. On comparing with the average industry ROE of 2.8% the company's ROE looks pretty remarkable. Probably as a result of this, A-Sonic Aerospace was able to see an impressive net income growth of 39% over the last five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.
Next, on comparing A-Sonic Aerospace's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 39% in the same period.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is A-Sonic Aerospace fairly valued compared to other companies? These 3 valuation measures might help you decide.