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Most readers would already be aware that Artesian Resources' (NASDAQ:ARTN.A) stock increased significantly by 12% over the past three months. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. Specifically, we decided to study Artesian Resources' ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
How Is ROE Calculated?
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 Artesian Resources is:
8.5% = US$20m ÷ US$239m (Based on the trailing twelve months to December 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 $0.09 in profit.
View our latest analysis for Artesian Resources
What Is The Relationship Between ROE And 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.
Artesian Resources' Earnings Growth And 8.5% ROE
When you first look at it, Artesian Resources' ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 9.9%. On the other hand, Artesian Resources reported a fairly low 3.4% net income growth over the past five years. Bear in mind, the company's ROE is not very high . So this could also be one of the reasons behind the company's low growth in earnings.
As a next step, we compared Artesian Resources' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 9.1% in the same period.
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. Has the market priced in the future outlook for ARTN.A? You can find out in our latest intrinsic value infographic research report
