Market Herald (ASX: TMH) shares have risen 52% in the past three months. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market results. In particular, we’ll be paying close attention to Market Herald’s ROE today.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. Simply put, it is used to assess a company’s profitability against its equity.
Check out our latest analysis for Market Herald
How do you calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, Market Herald’s ROE is:
33% = A $ 11 million ÷ A $ 33 million (based on the last twelve months to June 2021).
The “return” is the income the business has earned over the past year. This means that for every Australian dollar owned by shareholders, the company generated 0.33 Australian dollars in profit.
What does ROE have to do with profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. We now need to assess how much profit the company is reinvesting or “holding back” for future growth, which then gives us an idea of the growth potential of the company. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
Market Herald profit growth and 33% ROE
First, we recognize that Market Herald has a significantly high ROE. Second, even compared to the industry average of 21%, the company’s ROE is quite impressive. So the substantial 56% net income growth seen by Market Herald over the past five years is not too surprising.
Next, comparing with the growth in net income of the industry, we found that the growth of Market Herald is quite high compared to the industry average growth of 1.8% during the same period, this which is great to see.
Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are ahead of them. Is Market Herald properly valued against other companies? These 3 evaluation measures could help you decide.
Does Market Herald Effectively Reinvest Its Profits?
Although the company has paid part of its dividend in the past, it currently does not pay any dividends. This is probably what explains the high number of profit growth discussed above.
Overall, we are quite happy with the performance of Market Herald. In particular, it is great to see that the company is investing heavily in its business and with a high rate of return, which has resulted in significant growth in its profits. So far, we’ve only had a brief discussion of how the company’s earnings grow. You can do your own research on Market Herald and see how it has performed in the past by checking out this FREE detailed graphic past earnings, income and cash flow.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.