With its stock down 23% over the past three months, it is easy to disregard Watches of Switzerland Group (LON:WOSG). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Watches of Switzerland Group's ROE.
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.
See our latest analysis for Watches of Switzerland Group
How Is ROE Calculated?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Watches of Switzerland Group is:
24% = UK£73m ÷ UK£308m (Based on the trailing twelve months to October 2021).
The 'return' refers to a company's earnings over the last year. That means that for every £1 worth of shareholders' equity, the company generated £0.24 in profit.
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. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Watches of Switzerland Group's Earnings Growth And 24% ROE
First thing first, we like that Watches of Switzerland Group has an impressive ROE. Additionally, a comparison with the average industry ROE of 21% also portrays the company's ROE in a good light. Given the circumstances, the significant 67% net income growth seen by Watches of Switzerland Group over the last five years is not surprising.
As a next step, we compared Watches of Switzerland Group's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 1.0%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is Watches of Switzerland Group fairly valued compared to other companies? These 3 valuation measures might help you decide.