It is hard to get excited after looking at CT Automotive Group's (LON:CTA) recent performance, when its stock has declined 18% over the past three months. 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 CT Automotive Group's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for CT Automotive Group

How To 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 CT Automotive Group is:

42% = US$9.1m ÷ US$22m (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. That means that for every ￡1 worth of shareholders' equity, the company generated ￡0.42 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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

CT Automotive Group's Earnings Growth And 42% ROE

To begin with, CT Automotive Group has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 27% which is quite remarkable. So, the substantial 23% net income growth seen by CT Automotive Group over the past five years isn't overly surprising.

Next, on comparing CT Automotive Group's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 23% over the last few years.

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. 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 CT Automotive Group is trading on a high P/E or a low P/E, relative to its industry.