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Bechtle (ETR:BC8) has had a great run on the share market with its stock up by a significant 29% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Bechtle's ROE today.
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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Bechtle
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 Bechtle is:
13% = €245m ÷ €1.9b (Based on the trailing twelve months to December 2024).
The 'return' is the profit over the last twelve months. That means that for every €1 worth of shareholders' equity, the company generated €0.13 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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 Side By Side comparison of Bechtle's Earnings Growth And 13% ROE
At first glance, Bechtle seems to have a decent ROE. Even when compared to the industry average of 11% the company's ROE looks quite decent. This certainly adds some context to Bechtle's moderate 8.3% net income growth seen over the past five years.
As a next step, we compared Bechtle's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 7.0% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Bechtle fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Bechtle Using Its Retained Earnings Effectively?
With a three-year median payout ratio of 32% (implying that the company retains 68% of its profits), it seems that Bechtle is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.