Most readers would already be aware that Good Energy Group's (LON:GOOD) stock increased significantly by 50% 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. Specifically, we decided to study Good Energy Group's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Good Energy Group

How Is ROE Calculated?

Return on equity can be calculated by using the formula:

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

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

40% = UK￡20m ÷ UK￡51m (Based on the trailing twelve months to June 2023).

The 'return' is the income the business earned over the last year. So, this means that for every ￡1 of its shareholder's investments, the company generates a profit of ￡0.40.

Why Is ROE Important For 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. 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 Good Energy Group's Earnings Growth And 40% ROE

Firstly, we acknowledge that Good Energy Group has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 9.3% which is quite remarkable. So, the substantial 55% net income growth seen by Good Energy Group over the past five years isn't overly surprising.

As a next step, we compared Good Energy Group's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 30%.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Good Energy Group fairly valued compared to other companies? These 3 valuation measures might help you decide.