In This Article:
Wesfarmers' (ASX:WES) stock is up by 8.3% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Wesfarmers' ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for Wesfarmers
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Wesfarmers is:
30% = AU$2.5b ÷ AU$8.4b (Based on the trailing twelve months to December 2023).
The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.30 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. 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 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.
Wesfarmers' Earnings Growth And 30% ROE
First thing first, we like that Wesfarmers has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 8.4% also doesn't go unnoticed by us. Probably as a result of this, Wesfarmers was able to see a decent net income growth of 7.7% over the last five years.
Next, on comparing Wesfarmers' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 7.9% over the last few years.
Earnings growth is a huge factor in stock valuation. 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. If you're wondering about Wesfarmers''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.