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It is hard to get excited after looking at Artesian Resources' (NASDAQ:ARTN.A) recent performance, when its stock has declined 6.8% over the past three months. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. In this article, we decided to focus on Artesian Resources' ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Artesian Resources
How To 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 Artesian Resources is:
9.8% = US$17m ÷ US$172m (Based on the trailing twelve months to June 2021).
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 $0.10 in profit.
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.
Artesian Resources' Earnings Growth And 9.8% ROE
On the face of it, Artesian Resources' ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 9.8%. Even so, Artesian Resources has shown a fairly decent growth in its net income which grew at a rate of 6.6%. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.
We then compared Artesian Resources' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 9.1% in the same period, which is a bit concerning.