With its stock down 16% over the past three months, it is easy to disregard Webis Holdings (LON:WEB). 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. Particularly, we will be paying attention to Webis Holdings' ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Webis Holdings
How To 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 Webis Holdings is:
2.0% = US$33k ÷ US$1.6m (Based on the trailing twelve months to November 2021).
The 'return' is the yearly profit. That means that for every £1 worth of shareholders' equity, the company generated £0.02 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. 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.
A Side By Side comparison of Webis Holdings' Earnings Growth And 2.0% ROE
It is hard to argue that Webis Holdings' ROE is much good in and of itself. Even when compared to the industry average of 8.2%, the ROE figure is pretty disappointing. Despite this, surprisingly, Webis Holdings saw an exceptional 33% net income growth over the past five years. Therefore, there could be other reasons behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.
Given that the industry shrunk its earnings at a rate of 22% in the same period, the net income growth of the company is quite impressive.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Webis Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.