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It is hard to get excited after looking at FitLife Brands' (NASDAQ:FTLF) recent performance, when its stock has declined 2.3% over the past month. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on FitLife Brands' 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. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for FitLife Brands
How Do You Calculate Return On Equity?
ROE 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 FitLife Brands is:
25% = US$8.0m ÷ US$32m (Based on the trailing twelve months to June 2024).
The 'return' is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.25 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
FitLife Brands' Earnings Growth And 25% ROE
To begin with, FitLife Brands has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 11% the company's ROE is quite impressive. Probably as a result of this, FitLife Brands was able to see a decent net income growth of 10% over the last five years.
As a next step, we compared FitLife Brands' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 7.2%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about FitLife Brands''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.