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Trade Desk (NASDAQ:TTD) has had a great run on the share market with its stock up by a significant 41% over the last three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on Trade Desk's ROE.
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 Trade Desk
How Do You 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 Trade Desk is:
4.0% = US$77m ÷ US$1.9b (Based on the trailing twelve months to March 2023).
The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.04 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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. 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.
Trade Desk's Earnings Growth And 4.0% ROE
It is quite clear that Trade Desk's ROE is rather low. Not just that, even compared to the industry average of 12%, the company's ROE is entirely unremarkable. Accordingly, Trade Desk's low net income growth of 4.7% over the past five years can possibly be explained by the low ROE amongst other factors.
We then compared Trade Desk's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 8.7% in the same 5-year period, which is a bit concerning.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Trade Desk's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.