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It is hard to get excited after looking at LIMES Schlosskliniken's (ETR:LIK) recent performance, when its stock has declined 15% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to LIMES Schlosskliniken's ROE today.
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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for LIMES Schlosskliniken
How Is ROE Calculated?
ROE 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 LIMES Schlosskliniken is:
23% = €4.3m ÷ €18m (Based on the trailing twelve months to June 2024).
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 €0.23 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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
LIMES Schlosskliniken's Earnings Growth And 23% ROE
To begin with, LIMES Schlosskliniken has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 7.9% the company's ROE is quite impressive. As a result, LIMES Schlosskliniken's exceptional 50% net income growth seen over the past five years, doesn't come as a surprise.
Next, on comparing with the industry net income growth, we found that LIMES Schlosskliniken's growth is quite high when compared to the industry average growth of 7.2% 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 LIMES Schlosskliniken fairly valued compared to other companies? These 3 valuation measures might help you decide.