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With its stock down 19% over the past three months, it is easy to disregard Elmos Semiconductor (ETR:ELG). 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 Elmos Semiconductor's ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for Elmos Semiconductor
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 Elmos Semiconductor is:
22% = €104m ÷ €483m (Based on the trailing twelve months to June 2024).
The 'return' is the yearly profit. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.22.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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 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.
Elmos Semiconductor's Earnings Growth And 22% ROE
To begin with, Elmos Semiconductor has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 14% the company's ROE is quite impressive. As a result, Elmos Semiconductor's exceptional 43% net income growth seen over the past five years, doesn't come as a surprise.
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 38% over the last few years.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is ELG fairly valued? This infographic on the company's intrinsic value has everything you need to know.