Credit Bureau Asia's (SGX:TCU) stock up by 3.7% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. Specifically, we decided to study Credit Bureau Asia's 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Credit Bureau Asia
How Do You Calculate Return On Equity?
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 Credit Bureau Asia is:
30% = S$19m ÷ S$64m (Based on the trailing twelve months to December 2022).
The 'return' is the yearly profit. So, this means that for every SGD1 of its shareholder's investments, the company generates a profit of SGD0.30.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
Credit Bureau Asia's Earnings Growth And 30% ROE
To begin with, Credit Bureau Asia has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 13% the company's ROE is quite impressive. This probably laid the groundwork for Credit Bureau Asia's moderate 8.2% net income growth seen over the past five years.
Next, on comparing Credit Bureau Asia's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 8.0% in the same period.
Earnings growth is a huge factor in stock valuation. 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. Is TCU fairly valued? This infographic on the company's intrinsic value has everything you need to know.