editorial-team@simplywallst.com (Simply Wall St)
4 min read
In This Article:
It is hard to get excited after looking at XRF Scientific’s (ASX:XRF) recent performance, when its stock has declined 15% over the past month. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on XRF Scientific’s ROE.
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.
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The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for XRF Scientific is:
18% = AU$9.8m ÷ AU$54m (Based on the trailing twelve months to December 2024).
The ‘return’ is the profit over the last twelve months. So, this means that for every A$1 of its shareholder’s investments, the company generates a profit of A$0.18.
Check out our latest analysis for XRF Scientific
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. 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.
At first glance, XRF Scientific seems to have a decent ROE. Further, the company’s ROE compares quite favorably to the industry average of 8.7%. Probably as a result of this, XRF Scientific was able to see an impressive net income growth of 23% over the last five years. However, there could also be other causes behind this growth. Such as – high earnings retention or an efficient management in place.
As a next step, we compared XRF Scientific’s net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 19% in the same period.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 XRF Scientific is trading on a high P/E or a low P/E, relative to its industry.
