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Elmos Semiconductor's (ETR:ELG) stock is up by a considerable 28% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Elmos Semiconductor's ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Elmos Semiconductor
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 Elmos Semiconductor is:
22% = €99m ÷ €448m (Based on the trailing twelve months to December 2023).
The 'return' refers to a company's earnings over the last year. That means that for every €1 worth of shareholders' equity, the company generated €0.22 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. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
A Side By Side comparison of Elmos Semiconductor's Earnings Growth And 22% ROE
First thing first, we like that Elmos Semiconductor has an impressive ROE. Even when compared to the industry average of 19% the company's ROE is pretty decent. As a result, Elmos Semiconductor's remarkable 37% net income growth seen over the past 5 years is likely aided by its high ROE.
Next, on comparing Elmos Semiconductor's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 36% over the last few years.
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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Elmos Semiconductor's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.