It is hard to get excited after looking at Bilfinger's (ETR:GBF) recent performance, when its stock has declined 11% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Bilfinger's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Bilfinger

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 Bilfinger is:

18% = €218m ÷ €1.2b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. That means that for every €1 worth of shareholders' equity, the company generated €0.18 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A Side By Side comparison of Bilfinger's Earnings Growth And 18% ROE

At first glance, Bilfinger seems to have a decent ROE. On comparing with the average industry ROE of 5.4% the company's ROE looks pretty remarkable. This probably laid the ground for Bilfinger's significant 35% net income growth seen over the past five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Bilfinger'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 18%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is Bilfinger fairly valued compared to other companies? These 3 valuation measures might help you decide.