With its stock down 18% over the past three months, it is easy to disregard CAR Group (ASX:CAR). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study CAR Group's  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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for CAR Group is:

9.6% = AU$293m ÷ AU$3.1b (Based on the trailing twelve months to June 2025).

The 'return' is the yearly profit. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.10.

Check out our latest analysis for CAR Group

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

A Side By Side comparison of CAR Group's Earnings Growth And 9.6% ROE

At first glance, CAR Group's ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 9.6%. Even so, CAR Group has shown a fairly decent growth in its net income which grew at a rate of 18%. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing CAR Group's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 22% over the last few years.ASX:CAR Past Earnings Growth November 21st 2025

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for CAR? You can find out in our latest intrinsic value infographic research report.

Story Continues

Is CAR Group Making Efficient Use Of Its Profits?

CAR Group has a significant three-year median payout ratio of 88%, meaning that it is left with only 12% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Moreover, CAR Group is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 80% of its profits over the next three years. Regardless, the future ROE for CAR Group is predicted to rise to 17% despite there being not much change expected in its payout ratio.

Conclusion

On the whole, we do feel that CAR Group has some positive attributes. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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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