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James Latham's (LON:LTHM) stock up by 2.1% over the past month. 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 James Latham's ROE.
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.
View our latest analysis for James Latham
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 James Latham is:
25% = UK£36m ÷ UK£146m (Based on the trailing twelve months to September 2021).
The 'return' is the income the business earned over the last year. That means that for every £1 worth of shareholders' equity, the company generated £0.25 in profit.
What Is The Relationship Between ROE And 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
A Side By Side comparison of James Latham's Earnings Growth And 25% ROE
To begin with, James Latham has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 19% which is quite remarkable. Probably as a result of this, James Latham was able to see a decent net income growth of 16% over the last five years.
Next, on comparing with the industry net income growth, we found that James Latham's growth is quite high when compared to the industry average growth of 11% in the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. 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 James Latham fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is James Latham Using Its Retained Earnings Effectively?
With a three-year median payout ratio of 28% (implying that the company retains 72% of its profits), it seems that James Latham is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.