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With its stock down 8.1% over the past month, it is easy to disregard Computacenter (LON:CCC). 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. In this article, we decided to focus on Computacenter's ROE.
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 Computacenter
How Do You Calculate Return On Equity?
ROE 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 Computacenter is:
25% = UK£187m ÷ UK£745m (Based on the trailing twelve months to December 2021).
The 'return' is the yearly profit. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.25 in profit.
What Has ROE Got To Do With 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. 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 Computacenter's Earnings Growth And 25% ROE
First thing first, we like that Computacenter has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 9.6% also doesn't go unnoticed by us. So, the substantial 22% net income growth seen by Computacenter over the past five years isn't overly surprising.
We then performed a comparison between Computacenter's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 25% 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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is CCC fairly valued? This infographic on the company's intrinsic value has everything you need to know.