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It is hard to get excited after looking at Franklin Covey's (NYSE:FC) recent performance, when its stock has declined 6.0% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Franklin Covey's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for Franklin Covey
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 Franklin Covey is:
28% = US$23m ÷ US$83m (Based on the trailing twelve months to August 2024).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.28.
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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Franklin Covey's Earnings Growth And 28% ROE
First thing first, we like that Franklin Covey has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 20% which is quite remarkable. As a result, Franklin Covey's exceptional 42% net income growth seen over the past five years, doesn't come as a surprise.
We then compared Franklin Covey's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 11% in the same 5-year period.
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. Is Franklin Covey fairly valued compared to other companies? These 3 valuation measures might help you decide.