A-Sonic Aerospace (SGX:BTJ) has had a rough month with its share price down 5.8%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to A-Sonic Aerospace's ROE today.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for A-Sonic Aerospace

How Is ROE Calculated?

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 A-Sonic Aerospace is:

12% = US$5.5m ÷ US$46m (Based on the trailing twelve months to December 2022).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every SGD1 of its shareholder's investments, the company generates a profit of SGD0.12.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A-Sonic Aerospace's Earnings Growth And 12% ROE

To begin with, A-Sonic Aerospace seems to have a respectable ROE. On comparing with the average industry ROE of 2.8% the company's ROE looks pretty remarkable. Probably as a result of this, A-Sonic Aerospace was able to see an impressive net income growth of 39% over the last five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

Next, on comparing A-Sonic Aerospace's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 39% in the same period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is A-Sonic Aerospace fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is A-Sonic Aerospace Making Efficient Use Of Its Profits?

A-Sonic Aerospace's ' three-year median payout ratio is on the lower side at 6.7% implying that it is retaining a higher percentage (93%) of its profits. So it looks like A-Sonic Aerospace is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, A-Sonic Aerospace has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we are quite pleased with A-Sonic Aerospace's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard will have the 1 risk we have identified for A-Sonic Aerospace.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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