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With its stock down 18% over the past three months, it is easy to disregard FitLife Brands (NASDAQ:FTLF). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to FitLife Brands' 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. Put another way, it reveals the company's success at turning shareholder investments into profits.
Check out our latest analysis for FitLife Brands
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for FitLife Brands is:
25% = US$8.4m ÷ US$34m (Based on the trailing twelve months to September 2024).
The 'return' is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.25 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.
A Side By Side comparison of FitLife Brands' Earnings Growth And 25% ROE
First thing first, we like that FitLife Brands has an impressive ROE. Secondly, even when compared to the industry average of 8.9% the company's ROE is quite impressive. This probably laid the groundwork for FitLife Brands' moderate 9.2% net income growth seen over the past five years.
As a next step, we compared FitLife Brands' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 9.2% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about FitLife Brands''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.