It is hard to get excited after looking at Eckoh's (LON:ECK) recent performance, when its stock has declined 5.2% over the past week. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Eckoh'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for Eckoh
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 Eckoh is:
11% = UK£4.6m ÷ UK£42m (Based on the trailing twelve months to March 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 £0.11 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
Eckoh's Earnings Growth And 11% ROE
At first glance, Eckoh seems to have a decent ROE. Even when compared to the industry average of 9.5% the company's ROE looks quite decent. This probably goes some way in explaining Eckoh's moderate 17% growth over the past five years amongst other factors.
As a next step, we compared Eckoh's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 21% in the same period.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Eckoh's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.