Serco Group's (LON:SRP) stock is up by 5.3% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Serco 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. 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 Serco Group

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Serco Group is:

22% = UK￡212m ÷ UK￡984m (Based on the trailing twelve months to June 2023).

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 ￡0.22.

Why Is ROE Important For 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.

A Side By Side comparison of Serco Group's Earnings Growth And 22% ROE

To begin with, Serco Group has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 13% the company's ROE is quite impressive. So, the substantial 29% net income growth seen by Serco Group over the past five years isn't overly surprising.

We then performed a comparison between Serco Group's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 28% in the same 5-year period.

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). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Serco Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.