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Bytes Technology Group (LON:BYIT) has had a rough three months with its share price down 18%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Bytes Technology Group'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 Bytes Technology Group
How Is ROE Calculated?
Return on equity can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Bytes Technology Group is:
69% = UK£33m ÷ UK£48m (Based on the trailing twelve months to February 2022).
The 'return' refers to a company's earnings over the last year. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.69.
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. 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.
Bytes Technology Group's Earnings Growth And 69% ROE
Firstly, we acknowledge that Bytes Technology Group has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 8.7% also doesn't go unnoticed by us. So, the substantial 20% net income growth seen by Bytes Technology Group over the past five years isn't overly surprising.
As a next step, we compared Bytes Technology Group's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 15%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Bytes Technology Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.