editorial-team@simplywallst.com (Simply Wall St)
4 min read
In This Article:
It is hard to get excited after looking at Arcontech Group’s (LON:ARC) recent performance, when its stock has declined 36% over the past three months. 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 Arcontech Group’s ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
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ROE 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 Arcontech Group is:
13% = UK£1.0m ÷ UK£8.3m (Based on the trailing twelve months to December 2024).
The ‘return’ is the profit over the last twelve months. So, this means that for every £1 of its shareholder’s investments, the company generates a profit of £0.13.
Check out our latest analysis for Arcontech Group
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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.
To start with, Arcontech Group’s ROE looks acceptable. Further, the company’s ROE is similar to the industry average of 11%. For this reason, Arcontech Group’s five year net income decline of 2.6% raises the question as to why the decent ROE didn’t translate into growth. So, there might be some other aspects that could explain this. These include low earnings retention or poor allocation of capital.
However, when we compared Arcontech Group’s growth with the industry we found that while the company’s earnings have been shrinking, the industry has seen an earnings growth of 14% in the same period. This is quite worrisome.
