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With its stock down 7.5% over the past three months, it is easy to disregard Warpaint London (LON:W7L). 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 Warpaint London's ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Warpaint London
How Do You 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 Warpaint London is:
34% = UK£17m ÷ UK£51m (Based on the trailing twelve months to June 2024).
The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.34 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
Warpaint London's Earnings Growth And 34% ROE
First thing first, we like that Warpaint London has an impressive ROE. Further, even comparing with the industry average if 32%, the company's ROE is quite respectable. Given the circumstances, the significant 59% net income growth seen by Warpaint London over the last five years is not surprising.
As a next step, we compared Warpaint London'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 2.7%.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is W7L fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Warpaint London Making Efficient Use Of Its Profits?
Warpaint London has a significant three-year median payout ratio of 87%, meaning the company only retains 13% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.