With its stock down 5.3% over the past week, it is easy to disregard Resources Global Development (Catalist:QSD). 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 Resources Global Development'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Resources Global Development
How Is ROE Calculated?
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 Resources Global Development is:
38% = S$30m ÷ S$77m (Based on the trailing twelve months to December 2022).
The 'return' is the income the business earned over the last year. That means that for every SGD1 worth of shareholders' equity, the company generated SGD0.38 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. 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.
A Side By Side comparison of Resources Global Development's Earnings Growth And 38% ROE
First thing first, we like that Resources Global Development has an impressive ROE. Secondly, even when compared to the industry average of 8.3% the company's ROE is quite impressive. As a result, Resources Global Development's exceptional 63% net income growth seen over the past five years, doesn't come as a surprise.
As a next step, we compared Resources Global Development'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 37%.
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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Resources Global Development's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.