C-Com Satellite Systems' (CVE:CMI) stock is up by a considerable 17% over the past week. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. Particularly, we will be paying attention to C-Com Satellite Systems' 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for C-Com Satellite Systems

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 C-Com Satellite Systems is:

6.6% = CA$1.7m ÷ CA$26m (Based on the trailing twelve months to November 2023).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CA$1 of shareholders' capital it has, the company made CA$0.07 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. 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.

C-Com Satellite Systems' Earnings Growth And 6.6% ROE

On the face of it, C-Com Satellite Systems' ROE is not much to talk about. However, its ROE is similar to the industry average of 6.7%, so we won't completely dismiss the company. But C-Com Satellite Systems saw a five year net income decline of 27% over the past five years. Remember, the company's ROE is a bit low to begin with. Therefore, the decline in earnings could also be the result of this.

As a next step, we compared C-Com Satellite Systems' performance with the industry and found thatC-Com Satellite Systems' performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 0.1% in the same period, which is a slower than the company.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if C-Com Satellite Systems is trading on a high P/E or a low P/E, relative to its industry.