Gerresheimer's (ETR:GXI) stock is up by 4.3% over the past month. However, the company's financials look a bit inconsistent and market outcomes are ultimately driven by long-term fundamentals, meaning that the stock could head in either direction. In this article, we decided to focus on Gerresheimer's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Gerresheimer

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Gerresheimer is:

7.8% = €117m ÷ €1.5b (Based on the trailing twelve months to May 2024).

The 'return' is the profit over the last twelve months. That means that for every €1 worth of shareholders' equity, the company generated €0.08 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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Gerresheimer's Earnings Growth And 7.8% ROE

When you first look at it, Gerresheimer's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 7.8%. Having said that, Gerresheimer has shown a meagre net income growth of 4.5% over the past five years. Bear in mind, the company's ROE is not very high . Hence, this does provide some context to low earnings growth seen by the company.

Next, on comparing with the industry net income growth, we found that Gerresheimer's reported growth was lower than the industry growth of 14% over the last few years, which is not something we like to see.

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. Is GXI fairly valued? This infographic on the company's intrinsic value has everything you need to know.