HORNBACH Baumarkt (HMSE:HBM) has had a great run on the share market with its stock up by a significant 5.8% over the last month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study HORNBACH Baumarkt's ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for HORNBACH Baumarkt
How Do You Calculate Return On Equity?
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 HORNBACH Baumarkt is:
2.2% = €44m ÷ €2.0b (Based on the trailing twelve months to August 2023).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.02 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. 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.
A Side By Side comparison of HORNBACH Baumarkt's Earnings Growth And 2.2% ROE
It is quite clear that HORNBACH Baumarkt's ROE is rather low. Even compared to the average industry ROE of 3.7%, the company's ROE is quite dismal. However, the moderate 14% net income growth seen by HORNBACH Baumarkt over the past five years is definitely a positive. Therefore, the growth in earnings could probably have been caused by other variables. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
Next, on comparing with the industry net income growth, we found that HORNBACH Baumarkt's growth is quite high when compared to the industry average growth of 0.1% 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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is HORNBACH Baumarkt fairly valued compared to other companies? These 3 valuation measures might help you decide.