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Harworth Group (LON:HWG) has had a great run on the share market with its stock up by a significant 5.4% over the last week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Harworth Group's 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 Harworth Group
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 Harworth Group is:
16% = UK£94m ÷ UK£578m (Based on the trailing twelve months to December 2021).
The 'return' refers to a company's earnings over the last year. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.16.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.
A Side By Side comparison of Harworth Group's Earnings Growth And 16% ROE
At first glance, Harworth Group seems to have a decent ROE. Especially when compared to the industry average of 9.1% the company's ROE looks pretty impressive. This probably laid the ground for Harworth Group's moderate 9.3% net income growth seen over the past five years.
When you consider the fact that the industry earnings have shrunk at a rate of 3.5% in the same period, the company's net income growth is pretty remarkable.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Harworth Group fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Harworth Group Efficiently Re-investing Its Profits?
In Harworth Group's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 6.9% (or a retention ratio of 93%), which suggests that the company is investing most of its profits to grow its business.