XPEL's (NASDAQ:XPEL) stock is up by 7.7% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on XPEL's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for XPEL

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for XPEL is:

30% = US$49m ÷ US$167m (Based on the trailing twelve months to September 2023).

The 'return' refers to a company's earnings over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.30.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of XPEL's Earnings Growth And 30% ROE

Firstly, we acknowledge that XPEL has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 14% which is quite remarkable. As a result, XPEL's exceptional 36% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared XPEL'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 9.8%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about XPEL's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is XPEL Using Its Retained Earnings Effectively?

XPEL doesn't pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what's driving the high earnings growth number discussed above.