Stride (NYSE:LRN) stock is up 5.1% over the past week. Since the market usually pays for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could influence the market. Specifically, we decided to study Stride’s ROE in this article.
Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In simpler terms, it measures a company’s profitability relative to equity.
See our latest review for Stride
How to calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Stride is:
11% = $90 million ÷ $781 million (based on trailing 12 months to March 2022).
“Yield” refers to a company’s earnings over the past year. This therefore means that for every $1 of investment by its shareholder, the company generates a profit of $0.11.
What does ROE have to do with earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
A side-by-side comparison of Stride’s earnings growth and 11% ROE
For starters, Stride’s ROE looks acceptable. Especially when compared to the industry average of 8.0%, the company’s ROE looks quite impressive. Probably because of this, Stride has been able to see an impressive net income growth of 39% over the past five years. We believe there could be other factors at play here as well. Such as – high revenue retention or effective management in place.
Then, comparing with the industry net income growth, we found that Stride’s growth is quite high compared to the average industry growth of 11% over the same period, which is great have.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This then helps them determine if the stock is positioned for a bright or bleak future. Is Stride correctly valued compared to other companies? These 3 assessment metrics might help you decide.
Is Stride effectively using its retained earnings?
Stride pays no dividends to its shareholders, which means the company has reinvested all of its profits back into the business. This is probably what explains the strong earnings growth discussed above.
All in all, we’re pretty happy with Stride’s performance. In particular, we appreciate the fact that the company is reinvesting heavily in its business, and at a high rate of return. Unsurprisingly, this led to impressive earnings growth. That said, the latest forecasts from industry analysts show that the company’s earnings growth is expected to slow. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.