Is Watches of Switzerland Group plc's (LON:WOSG) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Most readers would already be aware that Watches of Switzerland Group's (LON:WOSG) stock increased significantly by 41% 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. In this article, we decided to focus on Watches of Switzerland Group's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. 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 Watches of Switzerland Group

How Is ROE Calculated?

Return on equity 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 Watches of Switzerland Group is:

24% = UK£73m ÷ UK£308m (Based on the trailing twelve months to October 2021).

The 'return' is the yearly profit. That means that for every £1 worth of shareholders' equity, the company generated £0.24 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.

Watches of Switzerland Group's Earnings Growth And 24% ROE

To begin with, Watches of Switzerland Group has a pretty high ROE which is interesting. Additionally, a comparison with the average industry ROE of 22% also portrays the company's ROE in a good light. As a result, Watches of Switzerland Group's remarkable 67% net income growth seen over the past 5 years is likely aided by its high ROE.

Next, on comparing with the industry net income growth, we found that Watches of Switzerland Group's growth is quite high when compared to the industry average growth of 0.03% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Watches of Switzerland Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Watches of Switzerland Group Making Efficient Use Of Its Profits?

Watches of Switzerland Group doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Summary

Overall, we are quite pleased with Watches of Switzerland Group's 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.