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With its stock down 6.3% over the past three months, it is easy to disregard Toromont Industries (TSE:TIH). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Toromont Industries' ROE in this article.
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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
View our latest analysis for Toromont Industries
How Is ROE Calculated?
Return on equity can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Toromont Industries is:
17% = CA$504m ÷ CA$2.9b (Based on the trailing twelve months to September 2024).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CA$1 of its shareholder's investments, the company generates a profit of CA$0.17.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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 Side By Side comparison of Toromont Industries' Earnings Growth And 17% ROE
To start with, Toromont Industries' ROE looks acceptable. Especially when compared to the industry average of 9.9% the company's ROE looks pretty impressive. Probably as a result of this, Toromont Industries was able to see a decent growth of 17% over the last five years.
Next, on comparing Toromont Industries' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 17% over the last few years.
Earnings growth is a huge factor in stock valuation. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Toromont Industries is trading on a high P/E or a low P/E, relative to its industry.