Fisher & Paykel Healthcare's (NZSE:FPH) stock up by 9.9% over the past three months. Given that the markets usually pay for the long-term financial health of a company, we wonder if the current momentum in the share price will keep up, given that the company's financials don't look very promising. Particularly, we will be paying attention to Fisher & Paykel Healthcare's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Fisher & Paykel Healthcare

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 Fisher & Paykel Healthcare is:

7.5% = NZ$133m ÷ NZ$1.8b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. So, this means that for every NZ$1 of its shareholder's investments, the company generates a profit of NZ$0.08.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.

A Side By Side comparison of Fisher & Paykel Healthcare's Earnings Growth And 7.5% ROE

When you first look at it, Fisher & Paykel Healthcare's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 7.4%. But Fisher & Paykel Healthcare saw a five year net income decline of 4.6% over the past five years. Remember, the company's ROE is a bit low to begin with. So that's what might be causing earnings growth to shrink.

However, when we compared Fisher & Paykel Healthcare's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 7.5% in the same period. This is quite worrisome.

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. If you're wondering about Fisher & Paykel Healthcare's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.