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It is hard to get excited after looking at NobleOak Life's (ASX:NOL) recent performance, when its stock has declined 12% over the past three months. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Specifically, we decided to study NobleOak Life'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. 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 NobleOak Life
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for NobleOak Life is:
4.2% = AU$2.8m ÷ AU$66m (Based on the trailing twelve months to December 2023).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.04 in profit.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
NobleOak Life's Earnings Growth And 4.2% ROE
As you can see, NobleOak Life's ROE looks pretty weak. Even compared to the average industry ROE of 13%, the company's ROE is quite dismal. Therefore, NobleOak Life's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.
We then compared NobleOak Life's net income growth with the industry and found that the average industry growth rate was 12% in the same 5-year period.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if NobleOak Life is trading on a high P/E or a low P/E, relative to its industry.