With its stock down 1.8% over the past week, it is easy to disregard GR Engineering Services (ASX:GNG). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to GR Engineering Services' ROE today.
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 GR Engineering Services
How Do You 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 GR Engineering Services is:
46% = AU$27m ÷ AU$60m (Based on the trailing twelve months to June 2023).
The 'return' refers to a company's earnings over the last year. That means that for every A$1 worth of shareholders' equity, the company generated A$0.46 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
GR Engineering Services' Earnings Growth And 46% ROE
Firstly, we acknowledge that GR Engineering Services has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 10% which is quite remarkable. Under the circumstances, GR Engineering Services' considerable five year net income growth of 42% was to be expected.
Next, on comparing with the industry net income growth, we found that GR Engineering Services' growth is quite high when compared to the industry average growth of 23% in the same period, which is great to see.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about GR Engineering Services''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.