Stelco Holdings' (TSE:STLC) stock is up by a considerable 39% 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. Particularly, we will be paying attention to Stelco Holdings' ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for Stelco Holdings
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Stelco Holdings is:
13% = CA$197m ÷ CA$1.5b (Based on the trailing twelve months to September 2023).
The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each CA$1 of shareholders' capital it has, the company made CA$0.13 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
A Side By Side comparison of Stelco Holdings' Earnings Growth And 13% ROE
At first glance, Stelco Holdings seems to have a decent ROE. Especially when compared to the industry average of 8.1% the company's ROE looks pretty impressive. This probably laid the ground for Stelco Holdings' moderate 19% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that Stelco Holdings' reported growth was lower than the industry growth of 28% over the last few years, which is not something we like to see.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Stelco Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.