Live Verdure (ASX:LV1) has faced a challenging three-month period, with its share price dropping by 10.0%. However, a closer examination of its robust financials suggests that there may be potential for long-term growth, as markets typically reward financially sound companies. In this article, we delve into Live Verdure’s ROE.
The Return on Equity (ROE) serves as a pivotal metric for assessing how well a company generates returns on the investments made by its shareholders. In simpler terms, it indicates the company’s success in converting shareholder investments into profits.
Check out our most recent analysis of Live Verdure
The ROE formula is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
Using this formula, the ROE for Live Verdure is calculated as follows:
72% = AU$69m ÷ AU$96m (Based on the trailing twelve months ending December 2024).
In this context, the ‘return’ represents the annual profit. This indicates that for every A$1 invested by its shareholders, the company generates A$0.72 in profit.
Thus far, we’ve established that ROE is a benchmark for a company’s profitability. By examining how much profit the company decides to reinvest or “retain,” we can gauge its capacity for future profit generation. Other factors being equal, companies with higher ROE and greater profit retention typically exhibit superior growth rates compared to those that lack these characteristics.
Firstly, it’s important to note that Live Verdure boasts a notably high ROE. Comparatively, its ROE of 72% is quite remarkable against the industry average of 4.3%. Consequently, Live Verdure’s impressive 59% net income growth over the past five years is not unexpected.
When viewed alongside the industry’s decline in earnings at a rate of 6.1% over the same five years, the company’s net income growth stands out significantly.
Earnings growth is a critical factor in stock valuation. Investors should assess whether the anticipated growth or decline in earnings is being factored into the stock price, as this can indicate whether the stock is poised for a prosperous or challenging future. One effective measure of expected earnings growth is the P/E ratio, which shows the price the market is willing to pay for a stock in relation to its earnings potential. Therefore, it would be wise to investigate whether Live Verdure’s P/E ratio is high or low compared to its industry.
