Most readers would already be aware that Trustpilot Group's (LON:TRST) stock increased significantly by 10% over the past month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Trustpilot Group's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Trustpilot Group

How To Calculate Return On Equity?

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 Trustpilot Group is:

32% = US$17m ÷ US$54m (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every ￡1 of its shareholder's investments, the company generates a profit of ￡0.32.

What Has ROE Got To Do With 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. 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.

Trustpilot Group's Earnings Growth And 32% ROE

Firstly, we acknowledge that Trustpilot Group has a significantly high ROE. Even when compared to the industry average of 32% the company's ROE is pretty decent. Therefore, it might not be wrong to say that the impressive five year 54% net income growth seen by Trustpilot Group was probably achieved as a result of the high ROE.

Next, on comparing with the industry net income growth, we found that Trustpilot Group's growth is quite high when compared to the industry average growth of 18% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Trustpilot Group is trading on a high P/E or a low P/E, relative to its industry.