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LIMES Schlosskliniken's (ETR:LIK) stock is up by a considerable 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. Specifically, we decided to study LIMES Schlosskliniken's ROE in this article.
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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
View our latest analysis for LIMES Schlosskliniken
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for LIMES Schlosskliniken is:
23% = €3.9m ÷ €17m (Based on the trailing twelve months to December 2023).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.23 in profit.
Why Is ROE Important For 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.
LIMES Schlosskliniken's Earnings Growth And 23% ROE
First thing first, we like that LIMES Schlosskliniken has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 4.7% also doesn't go unnoticed by us. Under the circumstances, LIMES Schlosskliniken's considerable five year net income growth of 59% was to be expected.
Given that the industry shrunk its earnings at a rate of 0.9% over the last few years, the net income growth of the company is quite impressive.
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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about LIMES Schlosskliniken's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.