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Bytes Technology Group (LON:BYIT) has had a rough month with its share price down 6.0%. 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. In this article, we decided to focus on Bytes Technology Group'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. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for Bytes Technology Group
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Bytes Technology Group is:
67% = UK£52m ÷ UK£78m (Based on the trailing twelve months to August 2024).
The 'return' is the profit over the last twelve months. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.67 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
A Side By Side comparison of Bytes Technology Group's Earnings Growth And 67% ROE
To begin with, Bytes Technology Group has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 10.0% the company's ROE is quite impressive. So, the substantial 20% net income growth seen by Bytes Technology Group over the past five years isn't overly surprising.
Next, on comparing with the industry net income growth, we found that Bytes Technology Group's growth is quite high when compared to the industry average growth of 14% in the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for BYIT? You can find out in our latest intrinsic value infographic research report.