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Klassik Radio's (ETR:KA8) stock is up by a considerable 14% over the past three months. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. In this article, we decided to focus on Klassik Radio'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.
Check out our latest analysis for Klassik Radio
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 Klassik Radio is:
8.3% = €579k ÷ €6.9m (Based on the trailing twelve months to June 2024).
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 €0.08.
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.
Klassik Radio's Earnings Growth And 8.3% ROE
At first glance, Klassik Radio's ROE doesn't look very promising. However, the fact that the its ROE is quite higher to the industry average of 5.8% doesn't go unnoticed by us. But then again, seeing that Klassik Radio's net income shrunk at a rate of 19% in the past five years, makes us think again. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Hence, this goes some way in explaining the shrinking earnings.
Furthermore, even when compared to the industry, which has been shrinking its earnings at a rate of 10% over the last few years, we found that Klassik Radio's performance is pretty disappointing, as it suggests that the company has been shrunk its earnings at a rate faster than the industry.
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). This then helps them determine if the stock is placed for a bright or bleak future. Is Klassik Radio fairly valued compared to other companies? These 3 valuation measures might help you decide.