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Most readers would already be aware that Plan Optik's (ETR:P4O) stock increased significantly by 19% 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. Specifically, we decided to study Plan Optik's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Plan Optik
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 Plan Optik is:
14% = €1.7m ÷ €12m (Based on the trailing twelve months to December 2023).
The 'return' is the income the business earned over the last year. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.14.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
Plan Optik's Earnings Growth And 14% ROE
To begin with, Plan Optik seems to have a respectable ROE. Even so, when compared with the average industry ROE of 19%, we aren't very excited. However, we are pleased to see the impressive 46% net income growth reported by Plan Optik over the past five years. We reckon that there could be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio. However, not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. So this also does lend some color to the high earnings growth seen by the company.
We then compared Plan Optik's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 38% in the same 5-year period.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Plan Optik fairly valued compared to other companies? These 3 valuation measures might help you decide.