Macfarlane Group (LON:MACF) has had a rough three months with its share price down 10%. 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 Macfarlane Group'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Macfarlane Group

How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Macfarlane Group is:

13% = UK￡15m ÷ UK￡117m (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every ￡1 worth of equity, the company was able to earn ￡0.13 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. 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.

Macfarlane Group's Earnings Growth And 13% ROE

To start with, Macfarlane Group's ROE looks acceptable. Even when compared to the industry average of 13% the company's ROE looks quite decent. This probably goes some way in explaining Macfarlane Group's moderate 12% growth over the past five years amongst other factors.

We then performed a comparison between Macfarlane Group's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 14% in the same 5-year 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. What is MACF worth today? The intrinsic value infographic in our free research report helps visualize whether MACF is currently mispriced by the market.