Yahoo Finance Connexion Telematics Ltd's (ASX:CXZ) Stock's On An Uptrend: Are Strong Financials Guiding The Market?
Most readers would already be aware that Connexion Telematics' (ASX:CXZ) stock increased significantly by 15% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Connexion Telematics' ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
See our latest analysis for Connexion Telematics
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 Connexion Telematics is:
33% = US$1.8m ÷ US$5.3m (Based on the trailing twelve months to June 2023).
The 'return' is the yearly profit. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.33.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
Connexion Telematics' Earnings Growth And 33% ROE
Firstly, we acknowledge that Connexion Telematics has a significantly high ROE. Secondly, even when compared to the industry average of 9.4% the company's ROE is quite impressive. Probably as a result of this, Connexion Telematics was able to see a decent net income growth of 12% over the last five years.
Next, on comparing with the industry net income growth, we found that Connexion Telematics' reported growth was lower than the industry growth of 22% over the last few years, which is not something we like to see.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 Connexion Telematics is trading on a high P/E or a low P/E, relative to its industry.
Is Connexion Telematics Using Its Retained Earnings Effectively?
Given that Connexion Telematics doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.
Summary
In total, we are pretty happy with Connexion Telematics' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount of growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. To know the 3 risks we have identified for Connexion Telematics visit our risks dashboard for free.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
