Educational Development (NASDAQ:EDUC) had a tough three months with its stock price down 42%. However, stock prices are usually determined by a company’s long-term financial performance, which in this case looks quite promising. In this article, we have decided to focus on the ROE of Educational Development.

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.

Check out our latest analysis for education development

How to calculate return on equity?

The return on equity formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the formula above, the ROE for educational development is:

18% = $8.3 million ÷ $47 million (based on trailing 12 months to February 2022).

“Yield” is the income the business has earned over the past year. One way to conceptualize this is that for every $1 of share capital it has, the firm has made a profit of $0.18.

What is the relationship between ROE and earnings growth?

We have already established that ROE serves as an effective earnings-generating indicator for a company’s future earnings. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. 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.

Revenue growth and 18% ROE for education development

At first glance, education development appears to have a decent ROE. And comparing with the industry, we found that the industry average ROE is similar at 19%. This certainly adds some context to the outstanding 23% net income growth of education development seen over the past five years. However, there could also be other drivers behind this growth. For example, the business has a low payout ratio or is efficiently managed.

We then performed a comparison between Educational Development’s net income growth and that of the industry, which revealed that the company’s growth is similar to the average industry growth of 23% over the past year. the same period.

past earnings-growth

Earnings growth is an important factor in stock valuation. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. By doing so, he will get an idea if the title is heading for clear blue waters or if swampy waters await. If you’re wondering about Educational Development’s valuation, check out this indicator of its price-to-earnings ratio, relative to its industry.

Does the development of education effectively use its benefits?

The three-year median payout ratio for Education Development is 28%, which is moderately low. The company retains the remaining 72%. On the face of it, the dividend is well covered and Educational Development is effectively reinvesting its earnings, as evidenced by its exceptional growth discussed above.

Furthermore, the development of education has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we believe that the performance of education development has been quite good. 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. If the company continues to increase its earnings as it has, it could have a positive impact on its share price given how earnings per share influence prices over the long term. Remember that the price of a stock also depends on the perceived risk. Therefore, investors should be aware of the risks involved before investing in a company. You can see the 6 risks we have identified for educational development by visiting our risk dashboard for free on our platform here.

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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.