QinetiQ Group (LON:QQ.) has had a great run on the share market with its stock up by a significant 30% over the last three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study QinetiQ 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for QinetiQ Group

How Do You Calculate Return On Equity?

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 QinetiQ Group is:

15% = UK￡140m ÷ UK￡926m (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. 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.

QinetiQ Group's Earnings Growth And 15% ROE

At first glance, QinetiQ Group seems to have a decent ROE. Even when compared to the industry average of 15% the company's ROE looks quite decent. Despite the moderate return on equity, QinetiQ Group has posted a net income growth of 4.4% over the past five years. A few likely reasons that could be keeping earnings growth low are - the company has a high payout ratio or the business has allocated capital poorly, for instance.

Next, on comparing with the industry net income growth, we found that QinetiQ Group's reported growth was lower than the industry growth of 17% over the last few years, which is not something we like to see.

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). Doing so will help them establish if the stock's future looks promising or ominous. What is QQ. worth today? The intrinsic value infographic in our free research report helps visualize whether QQ. is currently mispriced by the market.