With its stock down 8.2% over the past three months, it is easy to disregard EDAG Engineering Group (ETR:ED4). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to EDAG Engineering Group's ROE today.
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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for EDAG Engineering Group
How To Calculate Return On Equity?
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 EDAG Engineering Group is:
18% = €29m ÷ €157m (Based on the trailing twelve months to March 2023).
The 'return' refers to a company's earnings over the last year. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.18.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
EDAG Engineering Group's Earnings Growth And 18% ROE
To begin with, EDAG Engineering Group seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 14%. However, we are curious as to how the high returns still resulted in flat growth for EDAG Engineering Group in the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. These include low earnings retention or poor allocation of capital.
As a next step, we compared EDAG Engineering 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 0.7%.
Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about EDAG Engineering Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.