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Engenco's (ASX:EGN) stock is up by a considerable 18% 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 Engenco's ROE today.
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.
View our latest analysis for Engenco
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Engenco is:
9.9% = AU$9.2m ÷ AU$93m (Based on the trailing twelve months to December 2021).
The 'return' refers to a company's earnings over the last year. That means that for every A$1 worth of shareholders' equity, the company generated A$0.10 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
Engenco's Earnings Growth And 9.9% ROE
At first glance, Engenco seems to have a decent ROE. Even when compared to the industry average of 9.9% the company's ROE looks quite decent. This certainly adds some context to Engenco's moderate 5.9% net income growth seen over the past five years.
As a next step, we compared Engenco's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 26% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Engenco fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Engenco Efficiently Re-investing Its Profits?
Engenco has a healthy combination of a moderate three-year median payout ratio of 46% (or a retention ratio of 54%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.