Celtic (LON:CCP) has had a rough three months with its share price down 8.7%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Celtic's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Celtic

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 Celtic is:

31% = UK￡33m ÷ UK￡108m (Based on the trailing twelve months to June 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 ￡0.31 in profit.

Why Is ROE Important For 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.

Celtic's Earnings Growth And 31% ROE

To begin with, Celtic has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 19% which is quite remarkable. Probably as a result of this, Celtic was able to see a decent net income growth of 6.0% over the last five years.

As a next step, we compared Celtic's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 18% 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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Celtic fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Celtic Making Efficient Use Of Its Profits?

Given that Celtic doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.