With its stock down 1.6% over the past week, it is easy to disregard Credit Bureau Asia (SGX:TCU). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Credit Bureau Asia's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. 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 Credit Bureau Asia

How Do You Calculate Return On Equity?

Return on equity 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 Credit Bureau Asia is:

32% = S$22m ÷ S$68m (Based on the trailing twelve months to December 2023).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each SGD1 of shareholders' capital it has, the company made SGD0.32 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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.

Credit Bureau Asia's Earnings Growth And 32% ROE

Firstly, we acknowledge that Credit Bureau Asia has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 18% which is quite remarkable. This probably laid the groundwork for Credit Bureau Asia's moderate 9.1% net income growth seen over the past five years.

We then performed a comparison between Credit Bureau Asia's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 8.0% in the same 5-year 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 Credit Bureau Asia is trading on a high P/E or a low P/E, relative to its industry.