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It is hard to get excited after looking at Sosandar's (LON:SOS) recent performance, when its stock has declined 28% over the past three months. 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 Sosandar's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for Sosandar
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Sosandar is:
1.5% = UK£267k ÷ UK£18m (Based on the trailing twelve months to September 2024).
The 'return' is the profit over the last twelve months. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.02 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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
Sosandar's Earnings Growth And 1.5% ROE
It is quite clear that Sosandar's ROE is rather low. Even when compared to the industry average of 11%, the ROE figure is pretty disappointing. In spite of this, Sosandar was able to grow its net income considerably, at a rate of 65% in the last five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.
We then compared Sosandar'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 17% in the same 5-year period.
Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about Sosandar's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.