Grounds Real Estate Development (ETR:AMMN) has had a rough three months with its share price down 7.6%. 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. Particularly, we will be paying attention to Grounds Real Estate Development’s ROE today.
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.
See our latest analysis for Grounds Real Estate Development
How To 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 Grounds Real Estate Development is:
9.3% = €1.2m ÷ €13m (Based on the trailing twelve months to June 2020).
The ‘return’ refers to a company’s earnings over the last year. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.09 in profit.
Why Is ROE Important For 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.
A Side By Side comparison of Grounds Real Estate Development’s Earnings Growth And 9.3% ROE
At first glance, Grounds Real Estate Development seems to have a decent ROE. Yet, the fact that the company’s ROE is lower than the industry average of 13% does temper our expectations. However, we are pleased to see the impressive 43% net income growth reported by Grounds Real Estate Development over the past five years. Therefore, there could be other causes behind this growth. Such as – high earnings retention or an efficient management in place. However, not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. So this certainly also provides some context to the high earnings growth seen by the company.
We then compared Grounds Real Estate Development’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 6.4% in the same period.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock’s future looks promising or ominous. If you’re wondering about Grounds Real Estate Development’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Grounds Real Estate Development Using Its Retained Earnings Effectively?
In total, we are pretty happy with Grounds Real Estate Development’s performance. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let’s not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard would have the 3 risks we have identified for Grounds Real Estate Development.
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This article by Simply Wall St is general in nature. 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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