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Grand Venture Technology (SGX:JLB) has had a rough three months with its share price down 23%. 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. In this article, we decided to focus on Grand Venture Technology's ROE.
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.
View our latest analysis for Grand Venture Technology
How To Calculate Return On Equity?
ROE 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 Grand Venture Technology is:
8.2% = S$9.6m ÷ S$117m (Based on the trailing twelve months to June 2023).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every SGD1 worth of equity, the company was able to earn SGD0.08 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
Grand Venture Technology's Earnings Growth And 8.2% ROE
At first glance, Grand Venture Technology's ROE doesn't look very promising. However, the fact that the its ROE is quite higher to the industry average of 6.2% doesn't go unnoticed by us. Especially when you consider Grand Venture Technology's exceptional 31% net income growth over the past five years. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. So, there might well be other reasons for the earnings to grow. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.
Next, on comparing with the industry net income growth, we found that Grand Venture Technology's growth is quite high when compared to the industry average growth of 12% in the same period, which is great to see.