In This Article:
LegalZoom.com's (NASDAQ:LZ) stock is up by a considerable 30% 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. Particularly, we will be paying attention to LegalZoom.com's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
We've discovered 1 warning sign about LegalZoom.com. View them for free.
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for LegalZoom.com is:
16% = US$30m ÷ US$187m (Based on the trailing twelve months to March 2025).
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 $0.16 in profit.
Check out our latest analysis for LegalZoom.com
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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 LegalZoom.com's Earnings Growth And 16% ROE
At first glance, LegalZoom.com seems to have a decent ROE. Yet, the fact that the company's ROE is lower than the industry average of 20% does temper our expectations. That being the case, the significant five-year 54% net income growth reported by LegalZoom.com comes as a pleasant surprise. Therefore, there could be other causes behind this growth. Such as - high earnings retention or an efficient management in place. However, not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. So this certainly also provides some context to the high earnings growth seen by the company.
As a next step, we compared LegalZoom.com's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 11%.