Quartix Technologies (LON:QTX) has had a rough three months with its share price down 12%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Quartix Technologies' ROE.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for Quartix Technologies
How To Calculate Return On Equity?
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 Quartix Technologies is:
24% = UK£5.0m ÷ UK£21m (Based on the trailing twelve months to December 2022).
The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.24 in profit.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.
Quartix Technologies' Earnings Growth And 24% ROE
First thing first, we like that Quartix Technologies has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 7.5% also doesn't go unnoticed by us. As you might expect, the 7.7% net income decline reported by Quartix Technologies doesn't bode well with us. So, there might be some other aspects that could explain this. These include low earnings retention or poor allocation of capital.
That being said, we compared Quartix Technologies' 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 13% in the same period.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Quartix Technologies is trading on a high P/E or a low P/E, relative to its industry.