Smiths Group (LON:SMIN) has had a rough three months with its share price down 12%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Smiths Group's ROE today.

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.

See our latest analysis for Smiths Group

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 Smiths Group is:

11% = UK￡251m ÷ UK￡2.3b (Based on the trailing twelve months to July 2024).

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 ￡0.11.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 Smiths Group's Earnings Growth And 11% ROE

To start with, Smiths Group's ROE looks acceptable. Especially when compared to the industry average of 8.3% the company's ROE looks pretty impressive. Probably as a result of this, Smiths Group was able to see a decent growth of 17% over the last five years.

We then performed a comparison between Smiths Group's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 17% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. 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. What is SMIN worth today? The intrinsic value infographic in our free research report helps visualize whether SMIN is currently mispriced by the market.