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Franklin Covey (NYSE:FC) has had a rough three months with its share price down 35%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Franklin Covey's ROE in this article.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
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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 Franklin Covey is:
25% = US$18m ÷ US$73m (Based on the trailing twelve months to February 2025).
The 'return' is the income the business earned over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.25.
Check out our latest analysis for Franklin Covey
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.
A Side By Side comparison of Franklin Covey's Earnings Growth And 25% ROE
Firstly, we acknowledge that Franklin Covey has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 20% also doesn't go unnoticed by us. Under the circumstances, Franklin Covey's considerable five year net income growth of 34% was to be expected.
Next, on comparing with the industry net income growth, we found that Franklin Covey's growth is quite high when compared to the industry average growth of 11% in the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Franklin Covey is trading on a high P/E or a low P/E, relative to its industry.