Zardoya Otis (BME: ZOT) stock is up 4.0% in the past three months. Since stock prices are typically aligned with a company’s long-term financial performance, we set out to find out whether decent company financial data had played a role in recent price movements. In this article, we have decided to focus on Zardoya Otis’ ROE.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how efficiently their capital is being reinvested. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest review for Zardoya Otis
How is the ROE calculated?
the formula for ROE is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, Zardoya Otis’ ROE is:
34% = 142 million euros 18,418 million euros (based on the last twelve months up to February 2021).
The “return” is the income the business has earned over the past year. This therefore means that for 1 € investment by its shareholder, the company generates a profit of 0.34 €.
Why is ROE important for profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. 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. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
Zardoya Otis profit growth and 34% ROE
First of all, we love that Zardoya Otis has an impressive ROE. Additionally, the company’s ROE is 9.6% higher than the industry average, which is quite remarkable. As you might expect, the 2.1% drop in net profit reported by Zardoya Otis doesn’t bode well for us. We believe there might be other factors at play here that are preventing the growth of the business. For example, the company pays out a large portion of its profits as dividends or faces competitive pressures.
That being said, we compared Zardoya Otis’ performance with that of the industry and got worried when we found that while the company cut profits, the industry increased profits at a rate of 12%. during the same period.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This will help them determine whether the future of the stock looks bright or threatening. Is the ZOT correctly assessed? This intrinsic business value infographic has everything you need to know.
Is Zardoya Otis Reinvesting Profits Effectively?
With a high median payout rate of 81% over three years (implying that 19% of profits are retained), most of Zardoya Otis’ profits go to shareholders, which explains the company’s decline in profits. With very little to reinvest in the business, earnings growth is far from likely.
Additionally, Zardoya Otis has been paying dividends for at least ten years or more, suggesting that management must have perceived that shareholders prefer dividends over earnings growth. Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 97%. As a result, Zardoya Otis ‘ROE is not expected to change much either, which we have deduced from analysts’ estimate of 36% for future ROE.
Overall, we think Zardoya Otis certainly has some positive factors to consider. However, we are disappointed to see a lack of earnings growth despite a high ROE. Keep in mind that the company reinvests a small portion of its profits, which means investors do not reap the benefits of the high rate of return. That said, we have studied the latest analysts’ forecasts and found that while the company has cut profits in the past, analysts expect its profits to rise in the future. 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.
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