Most readers would already be aware that 4imprint Group's (LON:FOUR) stock increased significantly by 30% over the past three months. 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 4imprint Group's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for 4imprint 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 4imprint Group is:

79% = US$106m ÷ US$135m (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. Another way to think of that is that for every ￡1 worth of equity, the company was able to earn ￡0.79 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

4imprint Group's Earnings Growth And 79% ROE

To begin with, 4imprint Group has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 10% also doesn't go unnoticed by us. As a result, 4imprint Group's exceptional 31% net income growth seen over the past five years, doesn't come as a surprise.

Next, on comparing with the industry net income growth, we found that 4imprint Group's growth is quite high when compared to the industry average growth of 21% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is FOUR fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is 4imprint Group Using Its Retained Earnings Effectively?

4imprint Group's significant three-year median payout ratio of 55% (where it is retaining only 45% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.