Is United-Guardian, Inc.’s (NASDAQ:UG) Recent Price Movement Underpinned By Its Weak Fundamentals?

With its stock down 8.4% over the past three months, it is easy to disregard United-Guardian (NASDAQ:UG). We, however decided to study the company’s financials to determine if they have got anything to do with the price decline. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company’s financial performance. Specifically, we decided to study United-Guardian’s ROE in this article.

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.

See our latest analysis for United-Guardian

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 United-Guardian is:

42% = US$4.4m ÷ US$11m (Based on the trailing twelve months to June 2020).

The ‘return’ refers to a company’s earnings over the last year. One way to conceptualize this is that for each $1 of shareholders’ capital it has, the company made $0.42 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.

United-Guardian’s Earnings Growth And 42% ROE

To begin with, United-Guardian has a pretty high ROE which is interesting. Additionally, the company’s ROE is higher compared to the industry average of 13% which is quite remarkable. However, for some reason, the higher returns aren’t reflected in United-Guardian’s meagre five year net income growth average of 3.4%. This is interesting as the high returns should mean that the company has the ability to generate high growth but for some reason, it hasn’t been able to do so. A few likely reasons why this could happen is that the company could have a high payout ratio or the business has allocated capital poorly, for instance.

As a next step, we compared United-Guardian’s net income growth with the industry and were disappointed to see that the company’s growth is lower than the industry average growth of 9.9% in the same period.

past-earnings-growth
NasdaqGM:UG Past Earnings Growth August 26th 2020

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock’s future looks promising or ominous. If you’re wondering about United-Guardian’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is United-Guardian Efficiently Re-investing Its Profits?

United-Guardian has a very high three-year median payout ratio of 107%suggesting that the company’s shareholders are getting paid from more than just the company’s income. That’s a huge risk in our books. To know the 2 risks we have identified for United-Guardian visit our risks dashboard for free.

Moreover, United-Guardian has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

In total, we’re a bit ambivalent about United-Guardian’s performance. While the company does have a high rate of return, its low earnings retention is probably what’s hampering its earnings growth. So far, we’ve only made a quick discussion around the company’s earnings growth. To gain further insights into United-Guardian’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.
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