Live Verdure (ASX:LV1) has had a rough three months with its share price down 10.0%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Live Verdure’s 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. Put another way, it reveals the company’s success at turning shareholder investments into profits.
See our latest analysis for Live Verdure
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Live Verdure is:
72% = AU$69m ÷ AU$96m (Based on the trailing twelve months to December 2024).
The ‘return’ is the yearly profit. So, this means that for every A$1 of its shareholder’s investments, the company generates a profit of A$0.72.
So far, we’ve learned that ROE is a measure of a company’s profitability. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.
Firstly, we acknowledge that Live Verdure has a significantly high ROE. Secondly, even when compared to the industry average of 4.3% the company’s ROE is quite impressive. As a result, Live Verdure’s exceptional 59% net income growth seen over the past five years, doesn’t come as a surprise.
When you consider the fact that the industry earnings have shrunk at a rate of 6.1% in the same 5-year period, the company’s net income growth is pretty remarkable.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. 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 Live Verdure is trading on a high P/E or a low P/E, relative to its industry.
Read More: Could The Market Be Wrong About The Stock?
