Topicus.com (CVE:TOI) stock has risen by a remarkable 14% over the past three months. Given the company’s impressive performance, we decided to take a closer look at its financial indicators, as the financial health of a company in the long run usually determines market results. In this article, we decided to focus on Topicus.com’s return on equity.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on its shareholders’ investments. In other words, it shows how successful the company is in converting shareholders’ investments into profits.
Check out our latest analysis for Topicus.com
How do you calculate return on equity?
Return on equity can be calculated using the following formula:
Return on equity = Net profit (from continuing operations) ÷ Equity
Based on the above formula, the ROE for Topicus.com is:
29% = €126 million ÷ €437 million (based on the last twelve months to June 2024).
The “return” is the annual profit. You can imagine it like this: for every Canadian dollar of shareholder capital, the company generates 0.29 Canadian dollars in profit.
What is the relationship between ROE and earnings growth?
So far we have learned that return on equity measures how efficiently a company generates its profits. Now we need to evaluate how much profit the company reinvests or “retains” for future growth, which then gives us an idea of the company’s growth potential. Generally speaking, all other things being equal, companies with high return on equity and retention of profits will have a higher growth rate than companies that do not have these characteristics.
Topicus.com’s earnings growth and return on equity (29%)
First of all, Topicus.com has a fairly high return on equity, which is interesting. Second, we also didn’t miss a comparison with the industry average return on equity of 14%. Therefore, Topicus.com’s substantial net income growth of 32% over the past five years is not too surprising.
We then compared Topicus.com’s net profit growth with that of the industry and are pleased to see that the company’s growth rate is higher than that of the industry, which recorded a growth rate of 21% over the same 5-year period.
Earnings growth is an important yardstick when evaluating a stock. The investor should try to determine if the expected earnings growth or expected earnings decline, whichever may be the case, is built into the price. This will then help them determine if the stock is positioned for a good or bad future. If you are wondering about Topicus.com’s valuation, check out this yardstick of price-to-earnings ratio compared to the industry.
Does Topicus.com use its profits efficiently?
Since Topicus.com does not pay regular dividends to its shareholders, we assume that the company has reinvested all its profits to grow its business.
Summary
Overall, we are very pleased with Topicus.com’s performance. In particular, we like that the company reinvests a large portion of its profits at a high rate of return. This has naturally led to significant earnings growth for the company. If the company continues to grow its profits as it has done so far, this could have a positive impact on the share price, as earnings per share influence the long-term share price. Remember that the price of a stock also depends on the perceived risk, so investors need to educate themselves on the risks involved before investing in a company. To learn about the one risk we have identified for Topicus.com, visit our risk dashboard for free.
Do you have feedback on this article? Are you concerned about the content? Contact us directly from us. Alternatively, send an email to editorial-team (at) simplywallst.com.
This Simply Wall St article is of a general nature. We comment solely on historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
