Steppe Cement (LON:STCM) has had a rough three months with its share price down 17%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Steppe Cement's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Steppe Cement

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 Steppe Cement is:

12% = US$7.7m ÷ US$65m (Based on the trailing twelve months to June 2023).

The 'return' is the yearly profit. That means that for every ￡1 worth of shareholders' equity, the company generated ￡0.12 in profit.

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. 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 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.

Steppe Cement's Earnings Growth And 12% ROE

At first glance, Steppe Cement seems to have a decent ROE. Even when compared to the industry average of 11% the company's ROE looks quite decent. Consequently, this likely laid the ground for the decent growth of 17% seen over the past five years by Steppe Cement.

Next, on comparing with the industry net income growth, we found that Steppe Cement's growth is quite high when compared to the industry average growth of 11% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Steppe Cement is trading on a high P/E or a low P/E, relative to its industry.