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Will Weakness in LightInTheBox Holding Co., Ltd.'s (NYSE:LITB) Stock Prove Temporary Given Strong Fundamentals?

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With its stock down 39% over the past three months, it is easy to disregard LightInTheBox Holding (NYSE:LITB). 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. Specifically, we decided to study LightInTheBox Holding's ROE in this article.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for LightInTheBox Holding

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 LightInTheBox Holding is:

28% = US$14m ÷ US$51m (Based on the trailing twelve months to March 2021).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.28 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

LightInTheBox Holding's Earnings Growth And 28% ROE

To begin with, LightInTheBox Holding has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 22% the company's ROE is quite impressive. Under the circumstances, LightInTheBox Holding's considerable five year net income growth of 22% was to be expected.

Next, on comparing with the industry net income growth, we found that LightInTheBox Holding's reported growth was lower than the industry growth of 29% in the same period, which is not something we like to see.

past-earnings-growth
past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about LightInTheBox Holding's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is LightInTheBox Holding Efficiently Re-investing Its Profits?

Conclusion

On the whole, we feel that LightInTheBox Holding's performance has been quite good. 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 a good amount of growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. To know the 2 risks we have identified for LightInTheBox Holding visit our risks dashboard for free.

This article by Simply Wall St is general in nature. 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.

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