It is hard to get excited after looking at Ermenegildo Zegna's (NYSE:ZGN) recent performance, when its stock has declined 28% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Ermenegildo Zegna's  ROE.

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.

See our latest analysis for Ermenegildo Zegna

How Do You Calculate Return On Equity?

Return on equity can be calculated by using the formula:

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

So, based on the above formula, the ROE for Ermenegildo Zegna is:

13% = €115m ÷ €914m (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.13 in profit.

Why Is ROE Important For 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.

Ermenegildo Zegna's Earnings Growth And 13% ROE

At first glance, Ermenegildo Zegna seems to have a decent ROE. Even when compared to the industry average of 13% the company's ROE looks quite decent. This certainly adds some context to Ermenegildo Zegna's exceptional 46% net income growth seen over the past five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Ermenegildo Zegna'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 19%. past-earnings-growth

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Ermenegildo Zegna's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.



Is Ermenegildo Zegna Using Its Retained Earnings Effectively?

The three-year median payout ratio for Ermenegildo Zegna is 27%, which is moderately low. The company is retaining the remaining 73%. By the looks of it, the dividend is well covered and Ermenegildo Zegna is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

While Ermenegildo Zegna has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 32%. As a result, Ermenegildo Zegna's ROE is not expected to change by much either, which we inferred from the analyst estimate of 14% for future ROE.

Summary

In total, we are pretty happy with Ermenegildo Zegna's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the company's future earnings growth forecasts take a look at this freereport 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.