Anpario (LON:ANP) has had a great run on the share market with its stock up by a significant 6.5% over the last month. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Particularly, we will be paying attention to Anpario's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Anpario

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 Anpario is:

7.5% = UK￡2.5m ÷ UK￡34m (Based on the trailing twelve months to December 2023).

The 'return' refers to a company's earnings over the last year. That means that for every ￡1 worth of shareholders' equity, the company generated ￡0.08 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Anpario's Earnings Growth And 7.5% ROE

At first glance, Anpario's ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 9.1%. Having said that, Anpario's five year net income decline rate was 5.4%. Bear in mind, the company does have a slightly low ROE. So that's what might be causing earnings growth to shrink.

Furthermore, even when compared to the industry, which has been shrinking its earnings at a rate of 3.9% over the last few years, we found that Anpario's performance is pretty disappointing, as it suggests that the company has been shrunk its earnings at a rate faster than the industry.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. What is ANP worth today? The intrinsic value infographic in our free research report helps visualize whether ANP is currently mispriced by the market.