With its stock down 7.3% over the past month, it is easy to disregard Enerpac Tool Group (NYSE:EPAC). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Enerpac Tool Group's  ROE today.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Enerpac Tool Group

How To 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 Enerpac Tool Group is:

22% = US$86m ÷ US$398m (Based on the trailing twelve months to November 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.22.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Enerpac Tool Group's Earnings Growth And 22% ROE

To start with, Enerpac Tool Group's ROE looks acceptable. Especially when compared to the industry average of 13% the company's ROE looks pretty impressive. This certainly adds some context to Enerpac Tool Group's exceptional 36% net income growth seen over the past five years. However, there could also be other causes behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Enerpac Tool Group's growth is quite high when compared to the industry average growth of 17% in the same period, which is great to see.NYSE:EPAC Past Earnings Growth March 20th 2025

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. What is EPAC worth today? The  intrinsic value infographic in our free research report  helps visualize whether EPAC is currently mispriced by the market.

Story Continues

Is Enerpac Tool Group Using Its Retained Earnings Effectively?

Enerpac Tool Group's three-year median payout ratio to shareholders is 5.6%, which is quite low. This implies that the company is retaining 94% of its profits. So it looks like Enerpac Tool Group is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, Enerpac Tool Group has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

Overall, we are quite pleased with Enerpac Tool 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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the company's future earnings growth forecasts take a look at this freereport 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.

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