On the Beach Group's (LON:OTB) stock is up by 7.6% over the past three months. Given that the stock prices usually follow long-term business performance, we wonder if the company's mixed financials could have any adverse effect on its current price price movement Specifically, we decided to study On the Beach Group's ROE in this article.

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.

View our latest analysis for On the Beach Group

How Is ROE Calculated?

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 On the Beach Group is:

1.5% = UK￡2.3m ÷ UK￡153m (Based on the trailing twelve months to March 2023).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every ￡1 of its shareholder's investments, the company generates a profit of ￡0.02.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

A Side By Side comparison of On the Beach Group's Earnings Growth And 1.5% ROE

It is quite clear that On the Beach Group's ROE is rather low. Even when compared to the industry average of 8.3%, the ROE figure is pretty disappointing. Given the circumstances, the significant decline in net income by 38% seen by On the Beach Group over the last five years is not surprising. However, there could also be other factors causing the earnings to decline. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

As a next step, we compared On the Beach Group's performance with the industry and found thatOn the Beach Group's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 2.1% in the same period, which is a slower than the company.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about On the Beach Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.