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Randstad's (AMS:RAND) stock is up by 1.5% 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 Randstad's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
See our latest analysis for Randstad
How Do You 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 Randstad is:
10% = €435m ÷ €4.2b (Based on the trailing twelve months to September 2024).
The 'return' is the yearly profit. That means that for every €1 worth of shareholders' equity, the company generated €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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
Randstad's Earnings Growth And 10% ROE
To begin with, Randstad seems to have a respectable ROE. Yet, the fact that the company's ROE is lower than the industry average of 18% does temper our expectations. However, the moderate 6.9% net income growth seen by Randstad over the past five years is definitely a positive. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place. However, not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. So this also does lend some color to the fairly high earnings growth seen by the company.
As a next step, we compared Randstad'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.
Earnings growth is a huge factor in stock valuation. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Randstad is trading on a high P/E or a low P/E, relative to its industry.