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FW Thorpe's (LON:TFW) stock is up by a considerable 6.7% over the past week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study FW Thorpe's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for FW Thorpe
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 FW Thorpe is:
14% = UK£24m ÷ UK£177m (Based on the trailing twelve months to June 2024).
The 'return' is the profit over the last twelve months. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.14 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. 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.
FW Thorpe's Earnings Growth And 14% ROE
At first glance, FW Thorpe seems to have a decent ROE. Especially when compared to the industry average of 10% the company's ROE looks pretty impressive. This probably laid the ground for FW Thorpe's moderate 12% net income growth seen over the past five years.
We then performed a comparison between FW Thorpe's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 12% in the same 5-year period.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. 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 FW Thorpe is trading on a high P/E or a low P/E, relative to its industry.
Is FW Thorpe Using Its Retained Earnings Effectively?
With a three-year median payout ratio of 35% (implying that the company retains 65% of its profits), it seems that FW Thorpe is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.