With its stock down 12% over the past three months, it is easy to disregard FORTEC Elektronik (ETR:FEV). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to FORTEC Elektronik's 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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
View our latest analysis for FORTEC Elektronik
How Is ROE Calculated?
Return on equity can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for FORTEC Elektronik is:
12% = €6.5m ÷ €53m (Based on the trailing twelve months to December 2022).
The 'return' is the income the business earned over the last year. That means that for every €1 worth of shareholders' equity, the company generated €0.12 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. 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 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.
FORTEC Elektronik's Earnings Growth And 12% ROE
At first glance, FORTEC Elektronik seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 8.8%. Yet, FORTEC Elektronik has posted measly growth of 4.1% over the past five years. This is interesting as the high returns should mean that the company has the ability to generate high growth but for some reason, it hasn't been able to do so. A few likely reasons why this could happen is that the company could have a high payout ratio or the business has allocated capital poorly, for instance.
As a next step, we compared FORTEC Elektronik's 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 4.1% in the same 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. If you're wondering about FORTEC Elektronik's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.