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XPEL (NASDAQ:XPEL) has had a rough three months with its share price down 27%. 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. Specifically, we decided to study XPEL's ROE in this article.
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.
Check out our latest analysis for XPEL
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 XPEL is:
37% = US$32m ÷ US$84m (Based on the trailing twelve months to December 2021).
The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.37 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
XPEL's Earnings Growth And 37% ROE
Firstly, we acknowledge that XPEL has a significantly high ROE. Secondly, even when compared to the industry average of 9.6% the company's ROE is quite impressive. So, the substantial 51% net income growth seen by XPEL over the past five years isn't overly surprising.
Next, on comparing with the industry net income growth, we found that XPEL's growth is quite high when compared to the industry average growth of 6.1% in the same period, which is great to see.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is XPEL fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is XPEL Using Its Retained Earnings Effectively?
XPEL doesn't pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what's driving the high earnings growth number discussed above.