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It is hard to get excited after looking at Warehouse Group's (NZSE:WHS) recent performance, when its stock has declined 31% over the past three months. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Warehouse Group's 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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for Warehouse Group
How Is ROE Calculated?
ROE 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 Warehouse Group is:
11% = NZ$38m ÷ NZ$353m (Based on the trailing twelve months to January 2024).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every NZ$1 worth of equity, the company was able to earn NZ$0.11 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 Warehouse Group's Earnings Growth And 11% ROE
To begin with, Warehouse Group seems to have a respectable ROE. Even when compared to the industry average of 9.7% the company's ROE looks quite decent. Given the circumstances, we can't help but wonder why Warehouse Group saw little to no growth in the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. These include low earnings retention or poor allocation of capital.
We then compared Warehouse Group's net income growth with the industry and found that the average industry growth rate was 7.8% in the same 5-year period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is Warehouse Group fairly valued compared to other companies? These 3 valuation measures might help you decide.