Most readers would already be aware that Filtronic’s (LON:FTC) stock increased significantly by 32% over the past month. Given the company’s impressive performance, we decided to study its financial indicators more closely as a company’s financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Filtronic’s ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
How To Calculate Return On Equity?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Filtronic is:
12% = UK£1.1m ÷ UK£9.4m (Based on the trailing twelve months to November 2019).
The ‘return’ is the yearly profit. One way to conceptualize this is that for each £1 of shareholders’ capital it has, the company made £0.12 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learnt that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. 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 Filtronic’s Earnings Growth And 12% ROE
To start with, Filtronic’s ROE looks acceptable. Even when compared to the industry average of 13% the company’s ROE looks quite decent. This certainly adds some context to Filtronic’s exceptional 66% net income growth seen over the past five years. However, there could also be other drivers behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.
We then compared Filtronic’s net income growth with the industry and we’re pleased to see that the company’s growth figure is higher when compared with the industry which has a growth rate of 33% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. What is FTC worth today? The intrinsic value infographic in our free research report helps visualize whether FTC is currently mispriced by the market.
Is Filtronic Making Efficient Use Of Its Profits?
Given that Filtronic doesn’t pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.
On the whole, we feel that Filtronic’s performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company’s earnings growth is expected to slow down. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned.
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