Foraco International (TSE:FAR) has had a great run on the share market with its stock up by a significant 7.6% over the last month. 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 Foraco International’s ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.

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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 Foraco International is:

21% = US$19m ÷ US$89m (Based on the trailing twelve months to March 2025).

The ‘return’ is the profit over the last twelve months. So, this means that for every CA$1 of its shareholder’s investments, the company generates a profit of CA$0.21.

See our latest analysis for Foraco International

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.

A Side By Side comparison of Foraco International’s Earnings Growth And 21% ROE

To begin with, Foraco International seems to have a respectable ROE. Further, the company’s ROE compares quite favorably to the industry average of 10%. Probably as a result of this, Foraco International was able to see an impressive net income growth of 22% over the last five years. We believe that there might also be other aspects that are positively influencing the company’s earnings growth. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Foraco International’s growth is quite high when compared to the industry average growth of 18% in the same period, which is great to see.