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Most readers would already be aware that Hydratec Industries' (AMS:HYDRA) stock increased significantly by 16% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Hydratec Industries' 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. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for Hydratec Industries
How To Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Hydratec Industries is:
21% = €20m ÷ €95m (Based on the trailing twelve months to June 2024).
The 'return' is the yearly profit. That means that for every €1 worth of shareholders' equity, the company generated €0.21 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. 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.
Hydratec Industries' Earnings Growth And 21% ROE
To begin with, Hydratec Industries has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 8.8% the company's ROE is quite impressive. So, the substantial 25% net income growth seen by Hydratec Industries over the past five years isn't overly surprising.
Next, on comparing with the industry net income growth, we found that Hydratec Industries' growth is quite high when compared to the industry average growth of 7.6% in the same period, which is great to see.
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. This then helps them determine if the stock is placed for a bright or bleak future. Is Hydratec Industries fairly valued compared to other companies? These 3 valuation measures might help you decide.