Most readers would already be aware that EnviTec Biogas' (ETR:ETG) stock increased significantly by 26% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on EnviTec Biogas' ROE.

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.

View our latest analysis for EnviTec Biogas

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 EnviTec Biogas is:

32% = €64m ÷ €201m (Based on the trailing twelve months to December 2023).

The 'return' refers to a company's earnings over the last year. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.32.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

EnviTec Biogas' Earnings Growth And 32% ROE

Firstly, we acknowledge that EnviTec Biogas has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 8.5% also doesn't go unnoticed by us. Under the circumstances, EnviTec Biogas' considerable five year net income growth of 51% was to be expected.

Next, on comparing with the industry net income growth, we found that EnviTec Biogas' growth is quite high when compared to the industry average growth of 27% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. 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 EnviTec Biogas is trading on a high P/E or a low P/E, relative to its industry.