SurgePays (NASDAQ:SURG) has had a rough three months with its share price down 44%. 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. Specifically, we decided to study SurgePays' ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for SurgePays

How Is ROE Calculated?

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 SurgePays is:

73% = US$21m ÷ US$28m (Based on the trailing twelve months to December 2023).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.73 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

SurgePays' Earnings Growth And 73% ROE

First thing first, we like that SurgePays has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 18% which is quite remarkable. As a result, SurgePays' exceptional 38% net income growth seen over the past five years, doesn't come as a surprise.

Next, on comparing with the industry net income growth, we found that SurgePays' growth is quite high when compared to the industry average growth of 22% 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). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about SurgePays''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.