Comstock Holding Companies (NASDAQ:CHCI) has had a great run on the share market with its stock up by a significant 35% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Comstock Holding Companies' ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Comstock Holding Companies

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Comstock Holding Companies is:

21% = US$8.4m ÷ US$39m (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.21 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. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Comstock Holding Companies' Earnings Growth And 21% ROE

At first glance, Comstock Holding Companies seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 5.9%. Probably as a result of this, Comstock Holding Companies was able to see an impressive net income growth of 24% over the last five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Comstock Holding Companies' 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 7.5%.

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. If you're wondering about Comstock Holding Companies''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.