With its stock down 11% over the past three months, it is easy to disregard Foxtons Group (LON:FOXT). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Foxtons 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 Foxtons Group

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Foxtons Group is:

5.5% = UK￡7.3m ÷ UK￡131m (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. That means that for every ￡1 worth of shareholders' equity, the company generated ￡0.06 in profit.

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. 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.

A Side By Side comparison of Foxtons Group's Earnings Growth And 5.5% ROE

At first glance, Foxtons Group's ROE doesn't look very promising. However, its ROE is similar to the industry average of 6.4%, so we won't completely dismiss the company. Moreover, we are quite pleased to see that Foxtons Group's net income grew significantly at a rate of 71% over the last five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Foxtons Group's growth is quite high when compared to the industry average growth of 8.0% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is FOXT fairly valued? This infographic on the company's intrinsic value has everything you need to know.