In This Article:
Somero Enterprises' (LON:SOM) stock is up by a considerable 13% over the past month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Somero Enterprises' ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.
Check out our latest analysis for Somero Enterprises
How Do You 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 Somero Enterprises is:
34% = US$28m ÷ US$83m (Based on the trailing twelve months to December 2023).
The 'return' is the yearly profit. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.34 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.
A Side By Side comparison of Somero Enterprises' Earnings Growth And 34% ROE
Firstly, we acknowledge that Somero Enterprises has a significantly high ROE. Secondly, even when compared to the industry average of 14% the company's ROE is quite impressive. Probably as a result of this, Somero Enterprises was able to see a decent net income growth of 10% over the last five years.
We then performed a comparison between Somero Enterprises' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 9.8% in the same 5-year period.
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 Somero Enterprises fairly valued compared to other companies? These 3 valuation measures might help you decide.