Definity Financial (TSE:DFY) has had a great run on the share market with its stock up by a significant 28% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Definity Financial’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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

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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 Definity Financial is:

12% = CA$422m ÷ CA$3.6b (Based on the trailing twelve months to March 2025).

The ‘return’ is the income the business earned over the last year. So, this means that for every CA$1 of its shareholder’s investments, the company generates a profit of CA$0.12.

See our latest analysis for Definity Financial

Why Is ROE Important For 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 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.

Definity Financial’s Earnings Growth And 12% ROE

To begin with, Definity Financial seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 12%. This certainly adds some context to Definity Financial’s exceptional 30% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company’s earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Definity Financial’s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 9.4%.