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Heidelberg Materials' (ETR:HEI) stock is up by a considerable 22% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Heidelberg Materials' ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
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 Heidelberg Materials is:
9.4% = €1.9b ÷ €20b (Based on the trailing twelve months to December 2024).
The 'return' is the profit over the last twelve months. That means that for every €1 worth of shareholders' equity, the company generated €0.09 in profit.
See our latest analysis for Heidelberg Materials
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.
A Side By Side comparison of Heidelberg Materials' Earnings Growth And 9.4% ROE
At first glance, Heidelberg Materials seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 8.6%. Consequently, this likely laid the ground for the impressive net income growth of 38% seen over the past five years by Heidelberg Materials. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.
Next, on comparing with the industry net income growth, we found that Heidelberg Materials' growth is quite high when compared to the industry average growth of 8.9% in the same period, which is great to see.
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. 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 Heidelberg Materials''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.