editorial-team@simplywallst.com (Simply Wall St)
4 min read
Italtile (JSE:ITE) has had a rough three months with its share price down 25%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Italtile’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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
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:
19% = R1.5b ÷ R8.1b (Based on the trailing twelve months to December 2024).
The ‘return’ is the yearly profit. One way to conceptualize this is that for each ZAR1 of shareholders’ capital it has, the company made ZAR0.19 in profit.
Check out our latest analysis for Italtile
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.
At first glance, Italtile seems to have a decent ROE. On comparing with the average industry ROE of 14% the company’s ROE looks pretty remarkable. Despite this, Italtile’s five year net income growth was quite low averaging at only 4.5%. This is interesting as the high returns should mean that the company has the ability to generate high growth but for some reason, it hasn’t been able to do so. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or poor allocation of capital.
We then compared Italtile’s net income growth with the industry and found that the company’s growth figure is lower than the average industry growth rate of 9.6% in the same 5-year period, which is a bit concerning.
