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Fabasoft (ETR:FAA) has had a rough month with its share price down 9.0%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Fabasoft'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How Do You Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Fabasoft is:
28% = €9.9m ÷ €35m (Based on the trailing twelve months to December 2024).
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 €0.28 in profit.
See our latest analysis for Fabasoft
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. 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.
Fabasoft's Earnings Growth And 28% ROE
Firstly, we acknowledge that Fabasoft has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 14% which is quite remarkable. Given the circumstances, we can't help but wonder why Fabasoft saw little to no growth in the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
We then compared Fabasoft's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 6.2% in the same 5-year period, which is a bit concerning.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Fabasoft's's valuation, check out this gauge of its price-to-earnings ratio , as compared to its industry.