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Australian Clinical Labs (ASX:ACL) has had a great run on the share market with its stock up by a significant 30% over the last three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Australian Clinical Labs' ROE.
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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
Check out our latest analysis for Australian Clinical Labs
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 Australian Clinical Labs is:
9.5% = AU$16m ÷ AU$165m (Based on the trailing twelve months to December 2023).
The 'return' is the profit over the last twelve months. That means that for every A$1 worth of shareholders' equity, the company generated A$0.09 in profit.
Why Is ROE Important For 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.
A Side By Side comparison of Australian Clinical Labs' Earnings Growth And 9.5% ROE
When you first look at it, Australian Clinical Labs' ROE doesn't look that attractive. However, the fact that the its ROE is quite higher to the industry average of 6.7% doesn't go unnoticed by us. Yet, Australian Clinical Labs has posted measly growth of 3.2% over the past five years. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Therefore, the low growth in earnings could also be the result of this.
Next, on comparing with the industry net income growth, we found that the growth figure reported by Australian Clinical Labs compares quite favourably to the industry average, which shows a decline of 6.7% over the last few years.