Bechtle (ETR:BC8) has had a rough three months with its share price down 6.5%. 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 Bechtle's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Bechtle

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 Bechtle is:

15% = €261m ÷ €1.8b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.15.

What Has ROE Got To Do With 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.

Bechtle's Earnings Growth And 15% ROE

To start with, Bechtle's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 12%. This certainly adds some context to Bechtle's decent 11% net income growth seen over the past five years.

As a next step, we compared Bechtle'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 7.6%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for BC8? You can find out in our latest intrinsic value infographic research report.

Is Bechtle Efficiently Re-investing Its Profits?

With a three-year median payout ratio of 31% (implying that the company retains 69% of its profits), it seems that Bechtle is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.