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Supreme's (LON:SUP) stock is up by 3.7% over the past month. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. Specifically, we decided to study Supreme'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. Put another way, it reveals the company's success at turning shareholder investments into profits.
Check out our latest analysis for Supreme
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 Supreme is:
37% = UK£24m ÷ UK£65m (Based on the trailing twelve months to September 2024).
The 'return' is the income the business earned over the last year. That means that for every £1 worth of shareholders' equity, the company generated £0.37 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.
Supreme's Earnings Growth And 37% ROE
First thing first, we like that Supreme has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 8.6% also doesn't go unnoticed by us. Under the circumstances, Supreme's considerable five year net income growth of 22% was to be expected.
We then performed a comparison between Supreme's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 22% 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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is SUP worth today? The intrinsic value infographic in our free research report helps visualize whether SUP is currently mispriced by the market.