Are Strong Financial Prospects The Force That Is Driving The Momentum In GDI Integrated Facility Services Inc.'s TSE:GDI) Stock?

GDI Integrated Facility Services (TSE:GDI) has had a great run on the share market with its stock up by a significant 16% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to GDI Integrated Facility Services' ROE today.

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.

View our latest analysis for GDI Integrated Facility Services

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for GDI Integrated Facility Services is:

14% = CA$48m ÷ CA$339m (Based on the trailing twelve months to December 2020).

The 'return' is the profit over the last twelve months. So, this means that for every CA$1 of its shareholder's investments, the company generates a profit of CA$0.14.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

GDI Integrated Facility Services' Earnings Growth And 14% ROE

At first glance, GDI Integrated Facility Services seems to have a decent ROE. Especially when compared to the industry average of 8.9% the company's ROE looks pretty impressive. This probably laid the ground for GDI Integrated Facility Services' moderate 17% net income growth seen over the past five years.

Next, on comparing GDI Integrated Facility Services' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 17% 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. Doing so will help them establish if the stock's future looks promising or ominous. 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 GDI Integrated Facility Services is trading on a high P/E or a low P/E, relative to its industry.

Is GDI Integrated Facility Services Efficiently Re-investing Its Profits?

Summary

In total, we are pretty happy with GDI Integrated Facility Services' performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. You can see the 1 risk we have identified for GDI Integrated Facility Services by visiting our risks dashboard for free on our platform here.

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This article by Simply Wall St is general in nature. 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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