Could The Market Be Wrong About Somero Enterprises, Inc. (LON:SOM) Given Its Attractive Financial Prospects?

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With its stock down 21% over the past three months, it is easy to disregard Somero Enterprises (LON:SOM). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Somero Enterprises' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Somero Enterprises

How Do You 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 Somero Enterprises is:

46% = US$35m ÷ US$76m (Based on the trailing twelve months to December 2021).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.46 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

A Side By Side comparison of Somero Enterprises' Earnings Growth And 46% 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 12% which is quite remarkable. This probably laid the groundwork for Somero Enterprises' moderate 13% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Somero Enterprises' growth is quite high when compared to the industry average growth of 8.0% in the same period, which is great to see.

past-earnings-growth
AIM:SOM Past Earnings Growth June 26th 2022

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is Somero Enterprises fairly valued compared to other companies? These 3 valuation measures might help you decide.