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It is hard to get excited after looking at SMA Solar Technology's (ETR:S92) recent performance, when its stock has declined 55% over the past three months. 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 SMA Solar Technology's ROE in this article.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for SMA Solar Technology
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 SMA Solar Technology is:
23% = €166m ÷ €715m (Based on the trailing twelve months to June 2024).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.23 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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 SMA Solar Technology's Earnings Growth And 23% ROE
First thing first, we like that SMA Solar Technology has an impressive ROE. Secondly, even when compared to the industry average of 14% the company's ROE is quite impressive. Under the circumstances, SMA Solar Technology's considerable five year net income growth of 70% was to be expected.
As a next step, we compared SMA Solar Technology'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 38%.
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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if SMA Solar Technology is trading on a high P/E or a low P/E, relative to its industry.