Why Warren Buffett Loves Google Stock | Is Weakness In Alphabet Inc NASDAQ GOOGL Stock

Alphabet (NASDAQ:GOOGL) has had a rough week with its share price down 5.2%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Alphabet's ROE in this article.
Why Warren Buffett Loves Google Stock | Is Weakness In Alphabet Inc NASDAQ GOOGL Stock
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 Alphabet

How Do You Calculate Return On Equity?
ROE 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 Alphabet is:

24% = US$67b ÷ US$273b (Based on the trailing twelve months to September 2023).

The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.24 in profit.

What Has ROE Got To Do With 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 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.

Alphabet's Earnings Growth And 24% ROE
First thing first, we like that Alphabet has an impressive ROE. Secondly, even when compared to the industry average of 11% the company's ROE is quite impressive. So, the substantial 20% net income growth seen by Alphabet over the past five years isn't overly surprising.