Most readers would already be aware that Watches of Switzerland Group's (LON:WOSG) stock increased significantly by 13% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Watches of Switzerland Group'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Watches of Switzerland 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 Watches of Switzerland Group is:

11% = UK￡59m ÷ UK￡523m (Based on the trailing twelve months to April 2024).

The 'return' is the income the business earned over the last year. That means that for every ￡1 worth of shareholders' equity, the company generated ￡0.11 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Watches of Switzerland Group's Earnings Growth And 11% ROE

To start with, Watches of Switzerland Group's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 7.7%. This probably laid the ground for Watches of Switzerland Group's significant 39% net income growth seen over the past five years. However, there could also be other causes behind this growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Watches of Switzerland Group's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 10%.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Watches of Switzerland Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.