It is hard to get excited after looking at Italtile's (JSE:ITE) recent performance, when its stock has declined 10.0% over the past three months. 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. Particularly, we will be paying attention to Italtile's ROE today.
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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.
See our latest analysis for Italtile
How To 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 Italtile is:
28% = R1.9b ÷ R7.0b (Based on the trailing twelve months to June 2022).
The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each ZAR1 of shareholders' capital it has, the company made ZAR0.28 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.
Italtile's Earnings Growth And 28% ROE
At first glance, Italtile seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 17%. Probably as a result of this, Italtile was able to see a decent growth of 14% over the last five years.
As a next step, we compared Italtile'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 3.6%.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Italtile fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Italtile Efficiently Re-investing Its Profits?
Italtile has a healthy combination of a moderate three-year median payout ratio of 40% (or a retention ratio of 60%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.