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Hubbell (NYSE:HUBB) has had a rough three months with its share price down 13%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Hubbell's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
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 Hubbell is:
24% = US$784m ÷ US$3.3b (Based on the trailing twelve months to December 2024).
The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.24 in profit.
See our latest analysis for Hubbell
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. 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.
Hubbell's Earnings Growth And 24% ROE
To begin with, Hubbell has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 9.9% also doesn't go unnoticed by us. This likely paved the way for the modest 20% net income growth seen by Hubbell over the past five years.
We then performed a comparison between Hubbell's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 18% in the same 5-year 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. Has the market priced in the future outlook for HUBB? You can find out in our latest intrinsic value infographic research report.