GFT Technologies' (ETR:GFT) stock up by 6.1% 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. Particularly, we will be paying attention to GFT Technologies' ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for GFT Technologies

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for GFT Technologies is:

23% = €46m ÷ €201m (Based on the trailing twelve months to December 2022).

The 'return' is the income the business earned over the last year. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.23.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

GFT Technologies' Earnings Growth And 23% ROE

First thing first, we like that GFT Technologies has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 12% which is quite remarkable. As a result, GFT Technologies' exceptional 22% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared GFT Technologies' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 20% in the same period.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is GFT worth today? The intrinsic value infographic in our free research report helps visualize whether GFT is currently mispriced by the market.

Is GFT Technologies Using Its Retained Earnings Effectively?

The three-year median payout ratio for GFT Technologies is 31%, which is moderately low. The company is retaining the remaining 69%. So it seems that GFT Technologies is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Additionally, GFT Technologies 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 25%. Accordingly, forecasts suggest that GFT Technologies' future ROE will be 23% which is again, similar to the current ROE.

Conclusion

In total, we are pretty happy with GFT Technologies' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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