It is hard to get excited after looking at Francotyp-Postalia Holding's (ETR:FPH) recent performance, when its stock has declined 4.4% over the past week. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Francotyp-Postalia Holding's ROE today.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Francotyp-Postalia Holding

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 Francotyp-Postalia Holding is:

35% = €13m ÷ €38m (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.35 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. 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 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 Francotyp-Postalia Holding's Earnings Growth And 35% ROE

Firstly, we acknowledge that Francotyp-Postalia Holding has a significantly high ROE. Secondly, even when compared to the industry average of 16% the company's ROE is quite impressive. So, the substantial 36% net income growth seen by Francotyp-Postalia Holding over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that Francotyp-Postalia Holding's growth is quite high when compared to the industry average growth of 10% in the same period, which is great to see.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Francotyp-Postalia Holding's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.