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    LegalZoom.com, Inc.'s (NASDAQ:LZ) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

    Simply Wall St·04/07/2025 10:19:33
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    With its stock down 20% over the past month, it is easy to disregard LegalZoom.com (NASDAQ:LZ). 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. Particularly, we will be paying attention to LegalZoom.com's ROE today.

    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. 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 return on equity is:

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

    So, based on the above formula, the ROE for LegalZoom.com is:

    32% = US$30m ÷ US$93m (Based on the trailing twelve months to December 2024).

    The 'return' is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.32 in profit.

    View our latest analysis for LegalZoom.com

    What Is The Relationship Between ROE And Earnings Growth?

    So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

    LegalZoom.com's Earnings Growth And 32% ROE

    Firstly, we acknowledge that LegalZoom.com has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 20% which is quite remarkable. Under the circumstances, LegalZoom.com's considerable five year net income growth of 34% was to be expected.

    As a next step, we compared LegalZoom.com'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 10%.

    past-earnings-growth
    NasdaqGS:LZ Past Earnings Growth April 7th 2025

    Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is LegalZoom.com fairly valued compared to other companies? These 3 valuation measures might help you decide.

    Is LegalZoom.com Using Its Retained Earnings Effectively?

    LegalZoom.com doesn't pay any regular dividends currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

    Conclusion

    Overall, we are quite pleased with LegalZoom.com'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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.