Objective (ASX:OCL) shares fell 6.0% after a tough month. However, stock prices are usually driven by a company’s long-term performance, so this case looks very promising. Specifically, I chose to look at Objective’s ROE for this article.
Return on equity or ROE is an important metric used to assess how efficiently a company’s management is using the company’s capital. In other words, ROE shows the return each dollar makes on a shareholder’s investment.
Check out Objective’s latest analysis
ROE calculation method
Return on equity can be calculated using the following formula:
Return on Equity = Net Income (from Continuing Operations) ÷ Shareholders’ Equity
So, based on the above formula, our target ROE would be:
32% = AUD 20 million ÷ AUD 62 million (based on the last 12 months to June 2022).
“Return” is your profit over the last 12 months. Another way of looking at it is that for every A$1 worth of shares the company could earn him A$0.32.
What is the relationship between ROE and profit growth?
It has already been established that ROE serves as an efficient profit-making metric to gauge a company’s future earnings. Based on the amount of profits the company chooses to reinvest or “retain”, the company’s ability to generate profits in the future can be assessed. Assuming everything else is equal, higher ROE and profit margins will necessarily lead to higher growth for a company compared to a company that does not have these characteristics.
Objective revenue growth and 32% ROE
First, Objective has a pretty high ROE, which is interesting. Also, his ROE for the company is quite noteworthy, being high compared to the industry average of 9.7%. So the substantial 22% net profit growth Objective has seen over the past five years isn’t all that surprising.
A second comparison of Objective’s net profit growth with the industry revealed that the company’s growth matched the industry’s average growth rate of 20% over the same period.
The foundation for adding value to a company is largely tied to revenue growth. Investors should check whether expected earnings growth or decline is expected. Doing so will help you see if the stock’s future looks promising or ominous. If you’re in doubt about Objective’s valuation, check out this gauge of price/earnings ratio compared to the industry.
Is Objective reinvesting profits efficiently?
Objective’s median three-year payout rate is a fairly modest 50%, which means the company retains 50% of its revenue. This suggests that the dividend is well covered, and given the high growth discussed above, Objective appears to be reinvesting earnings efficiently.
Additionally, Objective has been paying dividends for at least 10 years. This demonstrates the company’s commitment to sharing profits with its shareholders. The company’s future dividend payout ratio is expected to be around 48% over the next three years, according to the latest analyst data. Therefore, projections suggest Objective’s future ROE will be 32%, which is also similar to his current ROE.
Overall, I’m pretty happy with Objective’s performance. Specifically, I like that the company reinvests most of its profits at a high rate of return. Of course, this has led the company to significant revenue growth. A survey of current analyst estimates found that analysts expect the company to continue its recent streak of growth.Learn more about the company’s future revenue growth projections here freedom For more information, see the company’s analyst forecasts report.
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This article by Simply Wall St is general in nature. We provide comments based on historical data and analyst projections using only unbiased methodologies and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. We aim to deliver long-term focused analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Is not …
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