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Most readers would already be aware that Bastei Lübbe's (ETR:BST) stock increased significantly by 23% over the past three months. 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. In this article, we decided to focus on Bastei Lübbe's ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Bastei Lübbe
How Is ROE Calculated?
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 Bastei Lübbe is:
14% = €8.8m ÷ €62m (Based on the trailing twelve months to March 2024).
The 'return' is the yearly profit. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.14 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 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.
Bastei Lübbe's Earnings Growth And 14% ROE
To begin with, Bastei Lübbe seems to have a respectable ROE. On comparing with the average industry ROE of 9.5% the company's ROE looks pretty remarkable. This certainly adds some context to Bastei Lübbe's exceptional 26% net income growth seen over the past five years. However, there could also be other causes behind this growth. 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.
Given that the industry shrunk its earnings at a rate of 2.5% over the last few years, the net income growth of the company is quite impressive.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Bastei Lübbe's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.