Gibraltar Industries' (NASDAQ:ROCK) stock is up by a considerable 11% over the past month. 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 Gibraltar 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for Gibraltar Industries
How Do You 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 Gibraltar Industries is:
13% = US$137m ÷ US$1.0b (Based on the trailing twelve months to December 2024).
The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.13 in profit.
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 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.
A Side By Side comparison of Gibraltar Industries' Earnings Growth And 13% ROE
At first glance, Gibraltar Industries seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 13%. This certainly adds some context to Gibraltar Industries' moderate 12% net income growth seen over the past five years.
As a next step, we compared Gibraltar Industries' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 16% in the same period.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is ROCK fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Gibraltar Industries Making Efficient Use Of Its Profits?
Given that Gibraltar Industries doesn't pay any regular dividends to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.
Summary
Overall, we are quite pleased with Gibraltar Industries' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount of growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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