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Vossloh (ETR:VOS) has had a great run on the share market with its stock up by a significant 16% over the last three months. 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 Vossloh's ROE today.
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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for Vossloh
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 Vossloh is:
9.2% = €60m ÷ €650m (Based on the trailing twelve months to March 2024).
The 'return' is the yearly profit. That means that for every €1 worth of shareholders' equity, the company generated €0.09 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
Vossloh's Earnings Growth And 9.2% ROE
To start with, Vossloh's ROE looks acceptable. Even when compared to the industry average of 9.6% the company's ROE looks quite decent. This probably goes some way in explaining Vossloh's significant 43% net income growth over the past five years amongst other factors. However, there could also be other drivers behind this growth. Such as - high earnings retention or an efficient management in place.
As a next step, we compared Vossloh'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 15%.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is VOS worth today? The intrinsic value infographic in our free research report helps visualize whether VOS is currently mispriced by the market.