With its stock down 22% over the past month, it is easy to disregard Centaur Media (LON:CAU). 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. Specifically, we decided to study Centaur Media's ROE in this article.

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.

Check out our latest analysis for Centaur Media

How To Calculate Return On Equity?

ROE 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 Centaur Media is:

12% = UK£5.3m ÷ UK£45m (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. That means that for every £1 worth of shareholders' equity, the company generated £0.12 in profit.

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. 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 Centaur Media's Earnings Growth And 12% ROE

To begin with, Centaur Media seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 9.9%. Consequently, this likely laid the ground for the impressive net income growth of 82% seen over the past five years by Centaur Media. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared Centaur Media's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 19% in the same 5-year 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 Centaur Media fairly valued compared to other companies? These 3 valuation measures might help you decide.