Most readers would already be aware that CALIDA Holding's (VTX:CALN) stock increased significantly by 14% over the past month. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on CALIDA Holding's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for CALIDA Holding
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 CALIDA Holding is:
8.5% = CHF16m ÷ CHF184m (Based on the trailing twelve months to June 2022).
The 'return' is the income the business earned over the last year. So, this means that for every CHF1 of its shareholder's investments, the company generates a profit of CHF0.08.
Why Is ROE Important For 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. 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 CALIDA Holding's Earnings Growth And 8.5% ROE
To begin with, CALIDA Holding seems to have a respectable ROE. Yet, the fact that the company's ROE is lower than the industry average of 17% does temper our expectations. Additionally, the flat earnings seen by CALIDA Holding over the past five years doesn't paint a very bright picture. Not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. Therefore, the flat earnings growth could be the result of other factors. These include low earnings retention or poor capital allocation.
As a next step, we compared CALIDA Holding's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 12% in the same period.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is CALN fairly valued? This infographic on the company's intrinsic value has everything you need to know.