Most readers already know that stock in Emeco Holdings (ASX: EHL) has risen significantly by 37% in the past three months. As most know, fundamentals typically guide long-term market price movements, so we decided to look at the company’s key financial metrics today to see if they have a role to play in the recent one. price movement. In this article, we have decided to focus on the ROE of Emeco Holdings.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In simpler terms, it measures a company’s profitability relative to equity.
Check out our latest analysis for Emeco Holdings
How is the ROE calculated?
the formula for ROE is:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE for Emeco Holdings is:
8.3% = A $ 42 million ÷ A $ 509 million (based on the last twelve months to December 2020).
“Return” refers to a company’s profits over the past year. So this means that for every Australian dollar invested by its shareholder, the company generates a profit of 0.08 Australian dollar.
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.
A side-by-side comparison of the earnings growth and 8.3% ROE of Emeco Holdings
At first glance, the ROE of Emeco Holdings does not look very promising. Still, further study shows that the company’s ROE is similar to the industry average of 9.1%. Looking in particular at Emeco Holdings’ outstanding five-year net profit growth of 67% over five years, we are truly impressed. Considering the fact that the ROE is not particularly high, we believe that there could also be other factors at play that could influence the growth of the company. For example, the business has a low payout ratio or is managed efficiently.
We then compared the net income growth of Emeco Holdings with the industry and we are happy to see that the growth figure of the company is higher than that of the industry which has a growth rate of 35%. during the same period.
Profit growth is an important metric to consider when valuing a stock. 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 will have an idea if the action is heading for clear blue waters or swampy waters ahead. Is EHL just valued? This intrinsic business value infographic has everything you need to know.
Is Emeco Holdings effectively reinvesting its profits?
Emeco Holdings does not pay any dividends to its shareholders, which means the company has reinvested all of its profits in the business. This is probably what explains the high number of profit growth discussed above.
All in all, it seems that Emeco Holdings has positive aspects for its business. Despite its low rate of return, the fact that the company reinvested a very large portion of its profits back into its business undoubtedly contributed to the strong profit growth. That said, the company’s earnings growth is expected to slow, as current analyst estimates predict. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
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This Simply Wall St article is general in nature. 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 material. Simply Wall St has no position in any of the stocks mentioned.
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