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Most readers would already be aware that StandardAero's (NYSE:SARO) stock increased significantly by 22% over the past month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on StandardAero's ROE.
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.
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How Is ROE Calculated?
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 StandardAero is:
2.9% = US$71m ÷ US$2.4b (Based on the trailing twelve months to March 2025).
The 'return' is the amount earned after tax over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.03 in profit.
See our latest analysis for StandardAero
What Has ROE Got To Do With 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.
StandardAero's Earnings Growth And 2.9% ROE
It is quite clear that StandardAero's ROE is rather low. Even compared to the average industry ROE of 12%, the company's ROE is quite dismal. However, we we're pleasantly surprised to see that StandardAero grew its net income at a significant rate of 78% in the last five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.
Next, on comparing with the industry net income growth, we found that StandardAero's growth is quite high when compared to the industry average growth of 13% in the same period, which is great to see.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. What is SARO worth today? The intrinsic value infographic in our free research report helps visualize whether SARO is currently mispriced by the market.