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Most readers would already be aware that M Winkworth's (LON:WINK) stock increased significantly by 17% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on M Winkworth's ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for M Winkworth
How Is ROE Calculated?
Return on equity 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 M Winkworth is:
25% = UK£1.7m ÷ UK£6.6m (Based on the trailing twelve months to December 2023).
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 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. 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.
M Winkworth's Earnings Growth And 25% ROE
To begin with, M Winkworth has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 5.6% the company's ROE is quite impressive. This likely paved the way for the modest 11% net income growth seen by M Winkworth over the past five years.
Next, on comparing with the industry net income growth, we found that M Winkworth's growth is quite high when compared to the industry average growth of 8.1% 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. If you're wondering about M Winkworth's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.