EDAG Engineering Group’s (ETR:ED4) stock up by 9.6% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on EDAG Engineering Group’s ROE.
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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for EDAG Engineering Group
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 EDAG Engineering Group is:
20% = €29m ÷ €148m (Based on the trailing twelve months to June 2023).
The ‘return’ is the amount earned after tax over the last twelve months. So, this means that for every €1 of its shareholder’s investments, the company generates a profit of €0.20.
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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
A Side By Side comparison of EDAG Engineering Group’s Earnings Growth And 20% ROE
To start with, EDAG Engineering Group’s ROE looks acceptable. On comparing with the average industry ROE of 15% the company’s ROE looks pretty remarkable. This certainly adds some context to EDAG Engineering Group’s decent 8.6% net income growth seen over the past five years.
We then compared EDAG Engineering Group’s net income growth with the industry and we’re pleased to see that the company’s growth figure is higher when compared with the industry which has a growth rate of 0.9% in the same 5-year period.
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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if EDAG Engineering Group is trading on a high P/E or a low P/E, relative to its industry.
Is EDAG Engineering Group Using Its Retained Earnings Effectively?
EDAG Engineering Group has a healthy combination of a moderate three-year median payout ratio of 44% (or a retention ratio of 56%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.
Additionally, EDAG Engineering Group has paid dividends over a period of seven years which means that the company is pretty serious about sharing its profits with shareholders. Based on the latest analysts’ estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 46%. Therefore, the company’s future ROE is also not expected to change by much with analysts predicting an ROE of 20%.
Conclusion
In total, we are pretty happy with EDAG Engineering Group’s performance. In particular, it’s great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company’s earnings are expected to accelerate. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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