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Total Telcom (CVE:TTZ) has had a rough week with its share price down 6.1%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Total Telcom's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. 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 Total Telcom
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Total Telcom is:
6.0% = CA$292k ÷ CA$4.9m (Based on the trailing twelve months to June 2024).
The 'return' is the income the business earned over the last year. That means that for every CA$1 worth of shareholders' equity, the company generated CA$0.06 in profit.
Why Is ROE Important For 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. 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.
Total Telcom's Earnings Growth And 6.0% ROE
At first glance, Total Telcom's ROE doesn't look very promising. Next, when compared to the average industry ROE of 8.1%, the company's ROE leaves us feeling even less enthusiastic. However, the moderate 6.3% net income growth seen by Total Telcom over the past five years is definitely a positive. So, there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.
As a next step, we compared Total Telcom's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 1.7%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Total Telcom's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.