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Taiga Building Products' (TSE:TBL) stock up by 2.6% over the past week. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. Specifically, we decided to study Taiga Building Products' 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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for Taiga Building Products
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 Taiga Building Products is:
11% = CA$50m ÷ CA$439m (Based on the trailing twelve months to September 2024).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.11 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. 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.
Taiga Building Products' Earnings Growth And 11% ROE
To start with, Taiga Building Products' ROE looks acceptable. Further, the company's ROE is similar to the industry average of 9.7%. Consequently, this likely laid the ground for the decent growth of 5.1% seen over the past five years by Taiga Building Products.
Next, on comparing with the industry net income growth, we found that Taiga Building Products' reported growth was lower than the industry growth of 17% over the last few years, which is not something we like 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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Taiga Building Products''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.