Comet Holding (VTX:COTN) has had a great run on the share market with its stock up by a significant 21% over the last three months. However, we decided to pay attention to the company’s fundamentals which don’t appear to give a clear sign about the company’s financial health. In this article, we decided to focus on Comet Holding’s ROE.
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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
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 Comet Holding is:
6.1% = CHF12m ÷ CHF196m (Based on the trailing twelve months to December 2019).
The ‘return’ is the profit over the last twelve months. That means that for every CHF1 worth of shareholders’ equity, the company generated CHF0.06 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. 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.
A Side By Side comparison of Comet Holding’s Earnings Growth And 6.1% ROE
At first glance, Comet Holding’s ROE doesn’t look very promising. Next, when compared to the average industry ROE of 12%, the company’s ROE leaves us feeling even less enthusiastic. Given the circumstances, the significant decline in net income by 15% seen by Comet Holding over the last five years is not surprising. We reckon that there could also be other factors at play here. Such as – low earnings retention or poor allocation of capital.
So, as a next step, we compared Comet Holding’s performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 9.0% in the same period.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for COTN? You can find out in our latest intrinsic value infographic research report.
Is Comet Holding Efficiently Re-investing Its Profits?
Despite having a normal three-year median payout ratio of 35% (where it is retaining 65% of its profits), Comet Holding has seen a decline in earnings as we saw above. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
In addition, Comet Holding has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to rise to 46% over the next three years. However, Comet Holding’s future ROE is expected to rise to 18% despite the expected increase in the company’s payout ratio. We infer that there could be other factors that could be driving the anticipated growth in the company’s ROE.
Overall, we have mixed feelings about Comet Holding. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Having said that, looking at current analyst estimates, we found that the company’s earnings growth rate is expected to see a huge improvement. 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.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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