It is hard to get excited after looking at Stadio Holdings' (JSE:SDO) recent performance, when its stock has declined 3.6% over the past three months. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Stadio Holdings' ROE today.
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.
Check out our latest analysis for Stadio Holdings
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 Stadio Holdings is:
9.9% = R186m ÷ R1.9b (Based on the trailing twelve months to December 2022).
The 'return' is the yearly profit. Another way to think of that is that for every ZAR1 worth of equity, the company was able to earn ZAR0.10 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.
Stadio Holdings' Earnings Growth And 9.9% ROE
It is hard to argue that Stadio Holdings' ROE is much good in and of itself. Not just that, even compared to the industry average of 18%, the company's ROE is entirely unremarkable. In spite of this, Stadio Holdings was able to grow its net income considerably, at a rate of 28% in the last five years. Therefore, there could be other reasons behind this growth. Such as - high earnings retention or an efficient management in place.
Next, on comparing with the industry net income growth, we found that Stadio Holdings' growth is quite high when compared to the industry average growth of 9.1% in the same period, which is great to see.
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. Doing so will help them establish if the stock's future looks promising or ominous. Is Stadio Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.