Most readers already know that stock in Emeco Holdings (ASX: EHL) has risen significantly by 16% in the past three months. Since stock prices are generally aligned with a company’s long-term financial performance, we decided to take a closer look at its financial metrics to see if they had a role to play in the recent price movement. . In particular, we will pay attention Emeco Holdings ROE today.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. Simply put, it is used to assess a company’s profitability against its equity.
How to calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE for Emeco Holdings is:
3.9% = A $ 21 million ÷ A $ 531 million (based on the last twelve months to June 2021).
The “return” is the annual profit. This means that for every Australian dollar of equity, the company generated 0.04 Australian dollar in profit.
Why is ROE important for profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
Growth in earnings of Emeco Holdings and 3.9% of ROE
It is difficult to say that the ROE of Emeco Holdings is very good on its own. Even compared to the industry average of 8.2%, the ROE figure is quite disappointing. However, we are pleasantly surprised to see that Emeco Holdings has increased its net income at a significant rate of 68% over the past five years. We believe that there could be other aspects that positively influence the company’s profit growth. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout rate.
Then, comparing with the growth in net income of the industry, we found that the growth of Emeco Holdings is quite high compared to the industry average growth of 28% during the same period, which is great to see.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. In doing so, he’ll have an idea if the action is heading for clear blue waters or swampy waters ahead. A good indicator of expected earnings growth is the P / E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So you may want check if Emeco Holdings is trading on a high P / E or a low P / E, compared to its industry.
Is Emeco Holdings effectively reinvesting its profits?
The three-year median payout ratio for Emeco Holdings is 31%, which is moderately low. The company retains the remaining 69%. So it looks like Emeco Holdings is reinvesting effectively so as to record impressive earnings growth (discussed above) and pay out a well-hedged dividend.
In addition, Emeco Holdings is determined to continue to share its profits with its shareholders, which we can deduce from its long history of paying dividends for at least ten years. After studying the latest consensus data from analysts, we found that the company is expected to continue to pay out around 35% of its profits over the next three years. However, Emeco Holdings’ ROE is expected to increase to 14% despite no expected change in its payout ratio.
Overall, we think Emeco Holdings certainly has some positive factors to consider. Even despite the low rate of return, the company has shown impressive profit growth by reinvesting heavily in its operations. However, a study of the latest analysts’ forecasts shows that the company is likely to experience a slowdown in future earnings growth. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St does not have any position in the mentioned stocks.
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