Tootsie Roll Industries' (NYSE:TR) stock up by 6.5% over the past 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 Tootsie Roll Industries' 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Tootsie Roll Industries

How To 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 Tootsie Roll Industries is:

11% = US$88m ÷ US$804m (Based on the trailing twelve months to September 2023).

The 'return' is the income the business earned over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.11.

What Has ROE Got To Do With 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. 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 Tootsie Roll Industries' Earnings Growth And 11% ROE

At first glance, Tootsie Roll Industries seems to have a decent ROE. Even when compared to the industry average of 11% the company's ROE looks quite decent. This probably goes some way in explaining Tootsie Roll Industries' moderate 5.2% growth over the past five years amongst other factors.

Next, on comparing with the industry net income growth, we found that Tootsie Roll Industries' reported growth was lower than the industry growth of 16% 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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Tootsie Roll Industries fairly valued compared to other companies? These 3 valuation measures might help you decide.