It is hard to get excited after looking at Computacenter's (LON:CCC) recent performance, when its stock has declined 8.2% over the past month. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Computacenter'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Computacenter

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 Computacenter is:

21% = UK￡199m ÷ UK￡949m (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 ￡0.21 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Computacenter's Earnings Growth And 21% ROE

At first glance, Computacenter seems to have a decent ROE. On comparing with the average industry ROE of 14% the company's ROE looks pretty remarkable. This probably laid the ground for Computacenter's moderate 17% net income growth seen over the past five years.

We then compared Computacenter'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 12% 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is CCC worth today? The intrinsic value infographic in our free research report helps visualize whether CCC is currently mispriced by the market.