Amadeus FiRe's (ETR:AAD) stock is up by a considerable 39% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Amadeus FiRe's ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for Amadeus FiRe
How Do You Calculate Return On Equity?
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 Amadeus FiRe is:
26% = €40m ÷ €153m (Based on the trailing twelve months to September 2022).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.26.
What Is The Relationship Between ROE And 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Amadeus FiRe's Earnings Growth And 26% ROE
To begin with, Amadeus FiRe has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 9.7% also doesn't go unnoticed by us. This probably laid the groundwork for Amadeus FiRe's moderate 11% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that the growth figure reported by Amadeus FiRe compares quite favourably to the industry average, which shows a decline of 11% in the same period.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. 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 Amadeus FiRe is trading on a high P/E or a low P/E, relative to its industry.