PROTEK (MCX:PRTK) has had a rough three months with its share price down 1.1%. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. In this article, we decided to focus on PROTEK’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. Put another way, it reveals the company’s success at turning shareholder investments into profits.
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for PROTEK is:
9.1% = ₽3.7b ÷ ₽41b (Based on the trailing twelve months to December 2019).
The ‘return’ is the yearly profit. Another way to think of that is that for every RUB1 worth of equity, the company was able to earn RUB0.09 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. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
A Side By Side comparison of PROTEK’s Earnings Growth And 9.1% ROE
It is hard to argue that PROTEK’s ROE is much good in and of itself. Further, we noted that the company’s ROE is similar to the industry average of 10%. Given the low ROE PROTEK’s five year net income decline of 12% is not surprising.
That being said, we compared PROTEK’s performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 10% in the same period.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. If you’re wondering about PROTEK’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is PROTEK Using Its Retained Earnings Effectively?
PROTEK’s declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 61% (or a retention ratio of 39%). With only very little left to reinvest into the business, growth in earnings is far from likely. You can see the 2 risks we have identified for PROTEK by visiting our risks dashboard for free on our platform here.
On the whole, PROTEK’s performance is quite a big let-down. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. So far, we’ve only made a quick discussion around the company’s earnings growth. To gain further insights into PROTEK’s past profit growth, check out this visualization of past earnings, revenue and cash flows.
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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. Thank you for reading.