Kainos Group (LON:KNOS) has had a great run on the share market with its stock up by a significant 14% over the last month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Kainos 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.

Check out our latest analysis for Kainos Group

How To 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 Kainos Group is:

31% = UK￡49m ÷ UK￡157m (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. That means that for every ￡1 worth of shareholders' equity, the company generated ￡0.31 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Kainos Group's Earnings Growth And 31% ROE

To begin with, Kainos Group has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 14% which is quite remarkable. This probably laid the groundwork for Kainos Group's moderate 18% net income growth seen over the past five years.

We then performed a comparison between Kainos Group's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 16% 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). 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 KNOS? You can find out in our latest intrinsic value infographic research report.

Is Kainos Group Making Efficient Use Of Its Profits?

Kainos Group has a significant three-year median payout ratio of 72%, meaning that it is left with only 28% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.