Most readers would already be aware that Microlise Group's (LON:SAAS) stock increased significantly by 49% over the past three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Specifically, we decided to study Microlise 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Microlise Group

How Do You Calculate Return On Equity?

The formula for ROE is:

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

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

2.0% = UK￡1.5m ÷ UK￡75m (Based on the trailing twelve months to June 2023).

The 'return' refers to a company's earnings over the last year. That means that for every ￡1 worth of shareholders' equity, the company generated ￡0.02 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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.

Microlise Group's Earnings Growth And 2.0% ROE

It is hard to argue that Microlise Group's ROE is much good in and of itself. Even compared to the average industry ROE of 9.1%, the company's ROE is quite dismal. For this reason, Microlise Group's five year net income decline of 26% is not surprising given its lower ROE. However, there could also be other factors causing the earnings to decline. Such as - low earnings retention or poor allocation of capital.

So, as a next step, we compared Microlise Group's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 14% over the last few years.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Microlise Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.