Cohort (LON:CHRT) has had a rough week with its share price down 4.7%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Cohort'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Cohort

How To Calculate Return On Equity?

Return on equity 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 Cohort is:

14% = UK￡15m ÷ UK￡110m (Based on the trailing twelve months to April 2024).

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 ￡0.14 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. 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.

Cohort's Earnings Growth And 14% ROE

At first glance, Cohort seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 15%. This probably goes some way in explaining Cohort's moderate 16% growth over the past five years amongst other factors.

As a next step, we compared Cohort's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 17% in the same period.

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. What is CHRT worth today? The intrinsic value infographic in our free research report helps visualize whether CHRT is currently mispriced by the market.

Is Cohort Efficiently Re-investing Its Profits?

Cohort has a healthy combination of a moderate three-year median payout ratio of 48% (or a retention ratio of 52%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.