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It is hard to get excited after looking at Koninklijke Philips' (AMS:PHIA) recent performance, when its stock has declined 17% over the past three months. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Particularly, we will be paying attention to Koninklijke Philips' ROE today.
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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
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How Do You Calculate Return On Equity?
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 Koninklijke Philips is:
2.0% = €237m ÷ €12b (Based on the trailing twelve months to March 2025).
The 'return' is the yearly profit. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.02 in profit.
See our latest analysis for Koninklijke Philips
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.
Koninklijke Philips' Earnings Growth And 2.0% ROE
As you can see, Koninklijke Philips' ROE looks pretty weak. Not just that, even compared to the industry average of 9.3%, the company's ROE is entirely unremarkable. Given the circumstances, the significant decline in net income by 48% seen by Koninklijke Philips over the last five years is not surprising. However, there could also be other factors causing the earnings to decline. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.
That being said, we compared Koninklijke Philips' performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 9.9% in the same 5-year period.