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With its stock down 13% over the past three months, it is easy to disregard Somero Enterprises (LON:SOM). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Somero Enterprises' ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
See our latest analysis for Somero Enterprises
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Somero Enterprises is:
30% = US$24m ÷ US$78m (Based on the trailing twelve months to June 2024).
The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.30 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
Somero Enterprises' Earnings Growth And 30% ROE
First thing first, we like that Somero Enterprises has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 14% which is quite remarkable. Probably as a result of this, Somero Enterprises was able to see a decent net income growth of 7.4% over the last five years.
As a next step, we compared Somero Enterprises' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 9.3% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. What is SOM worth today? The intrinsic value infographic in our free research report helps visualize whether SOM is currently mispriced by the market.