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With its stock down 10% over the past three months, it is easy to disregard Keystone Law Group (LON:KEYS). 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 Keystone Law 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.

See our latest analysis for Keystone Law Group

How To Calculate Return On Equity?

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 Keystone Law Group is:

45% = UK£7.9m ÷ UK£17m (Based on the trailing twelve months to July 2024).

The 'return' is the yearly profit. That means that for every £1 worth of shareholders' equity, the company generated £0.45 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Keystone Law Group's Earnings Growth And 45% ROE

First thing first, we like that Keystone Law Group has an impressive ROE. Secondly, even when compared to the industry average of 11% the company's ROE is quite impressive. This likely paved the way for the modest 15% net income growth seen by Keystone Law Group over the past five years.

Next, on comparing with the industry net income growth, we found that Keystone Law Group's growth is quite high when compared to the industry average growth of 10% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. 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. Has the market priced in the future outlook for KEYS? You can find out in our latest intrinsic value infographic research report.