Burger Fuel Group's (NZSE:BFG) stock up by 4.5% over the past month. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. Specifically, we decided to study Burger Fuel Group'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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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 Burger Fuel Group is:

13% = NZ$1.2m ÷ NZ$9.3m (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each NZ$1 of shareholders' capital it has, the company made NZ$0.13 in profit.

Check out our latest analysis for Burger Fuel Group

What Has ROE Got To Do With 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.

Burger Fuel Group's Earnings Growth And 13% ROE

At first glance, Burger Fuel Group seems to have a decent ROE. Especially when compared to the industry average of 8.8% the company's ROE looks pretty impressive. This certainly adds some context to Burger Fuel Group's decent 14% net income growth seen over the past five years.

We then compared Burger Fuel Group's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 31% in the same 5-year period, which is a bit concerning.

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). This then helps them determine if the stock is placed for a bright or bleak future. Is Burger Fuel Group fairly valued compared to other companies? These 3 valuation measures might help you decide.