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Most readers would already be aware that Elmos Semiconductor's (ETR:ELG) stock increased significantly by 23% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Elmos Semiconductor's ROE.
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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for Elmos Semiconductor
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 Elmos Semiconductor is:
19% = €63m ÷ €337m (Based on the trailing twelve months to September 2022).
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 €0.19.
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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
Elmos Semiconductor's Earnings Growth And 19% ROE
At first glance, Elmos Semiconductor seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 17%. This certainly adds some context to Elmos Semiconductor's moderate 10% net income growth seen over the past five years.
As a next step, we compared Elmos Semiconductor's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 14% in the same period.
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. This then helps them determine if the stock is placed for a bright or bleak future. What is ELG worth today? The intrinsic value infographic in our free research report helps visualize whether ELG is currently mispriced by the market.