With its stock down 12% over the past three months, it is easy to disregard CropEnergies (ETR:CE2). 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. Specifically, we decided to study CropEnergies' ROE in this article.
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.
View our latest analysis for CropEnergies
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 CropEnergies is:
25% = €210m ÷ €843m (Based on the trailing twelve months to November 2022).
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.
What Is The Relationship Between ROE And 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.
A Side By Side comparison of CropEnergies' Earnings Growth And 25% ROE
To begin with, CropEnergies has a pretty high ROE which is interesting. Additionally, a comparison with the average industry ROE of 25% also portrays the company's ROE in a good light. Given the circumstances, the significant 33% net income growth seen by CropEnergies over the last five years is not surprising.
Next, on comparing CropEnergies' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 36% in the same period.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is CropEnergies fairly valued compared to other companies? These 3 valuation measures might help you decide.