Is Techedge S.p.A.'s (BIT:EDGE) Stock's Recent Performance A Reflection Of Its Financial Health?

Techedge's (BIT:EDGE) stock is up by 2.7% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Techedge's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Techedge

How Is ROE Calculated?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Techedge is:

13% = €11m ÷ €84m (Based on the trailing twelve months to December 2019).

The 'return' is the yearly profit. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.13 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Techedge's Earnings Growth And 13% ROE

To begin with, Techedge seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 9.5%. This certainly adds some context to Techedge's decent 18% net income growth seen over the past five years.

We then performed a comparison between Techedge's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 18% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. 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 Techedge is trading on a high P/E or a low P/E, relative to its industry.

Is Techedge Efficiently Re-investing Its Profits?

In Techedge's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 12% (or a retention ratio of 88%), which suggests that the company is investing most of its profits to grow its business.

While Techedge has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend.

Summary

In total, we are pretty happy with Techedge's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings.

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This article by Simply Wall St is general in nature. 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.
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