The greatest thing about investing your hard-earned dollars? Compound returns -- or as I like to think of them, free money. As powerful as compound returns from interest can be for an individual investor, a company like E*Trade (NYSE:ET), with billions at its disposal, can turn an even tidier profit with help from that kind of cash.
For the fourth quarter ended Dec. 31, E*Trade earned $129.4 million, or $0.32 per share -- an increase of 44% from last year. The company received $1 billion of new cash in customer accounts -- on top of the $800 million it received last quarter.
That helped boost its full-year results to record highs. Net income grew to $430.4 million, or $1.12 per share, while revenue increased 15% to $1.7 billion.
Still think having all that cash doesn't help? In the fourth quarter, revenue climbed 19% to $478.9 million. According to its president and COO, 20% of the company's revenue comes from trading commissions, while 50% is the result of interest generated by customer cash.
E*Trade has also expanded its services to keep the cash flowing. It now features checking, money market, and credit card services in addition to its brokerage services. It believes, and I agree, that its plethora of services will protect it from the expected slowdown in 2006.
Looking ahead to 2006, E*Trade expects to earn between $1.25 and $1.40 per share with revenue between $2.2 billion and $2.4 billion. Those projections put the company's forward P/E between 15.8 and 17.7. Even though the stock has doubled over the past year, it still looks reasonably valued. Now, do you see why I love the idea of compound returns?
Fool contributor Mike Cianciolo welcomes feedback and doesn't own shares of E*Trade.
