Vodacom Group (JSE:VOD) has had a great run on the share market with its stock up by a significant 6.2% over the last week. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Vodacom 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 Vodacom Group

How Do You Calculate Return On Equity?

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 Vodacom Group is:

20% = R20b ÷ R99b (Based on the trailing twelve months to September 2023).

The 'return' is the income the business earned over the last year. That means that for every ZAR1 worth of shareholders' equity, the company generated ZAR0.20 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.

Vodacom Group's Earnings Growth And 20% ROE

To begin with, Vodacom Group seems to have a respectable ROE. Even when compared to the industry average of 25% the company's ROE looks quite decent. Vodacom Group's decent returns aren't reflected in Vodacom Group'smediocre five year net income growth average of 2.4%. A few likely reasons that could be keeping earnings growth low are - the company has a high payout ratio or the business has allocated capital poorly, for instance.

We then compared Vodacom Group's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 12% in the same 5-year period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. 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 Vodacom Group is trading on a high P/E or a low P/E, relative to its industry.