Standex International’s (NYSE:SXI) stock up by 8.0% over the past three months. However, we decided to study the company’s mixed-bag of fundamentals to assess what this could mean for future share prices, as stock prices tend to be aligned with a company’s long-term financial performance. Specifically, we decided to study Standex International’s ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Standex International is:
8.9% = US$41m ÷ US$462m (Based on the trailing twelve months to June 2020).
The ‘return’ is the amount earned after tax over the last twelve months. That means that for every $1 worth of shareholders’ equity, the company generated $0.09 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned 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. 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 Standex International’s Earnings Growth And 8.9% ROE
At first glance, Standex International’s ROE doesn’t look very promising. However, its ROE is similar to the industry average of 11%, so we won’t completely dismiss the company. Having said that, Standex International’s five year net income decline rate was 6.0%. Remember, the company’s ROE is a bit low to begin with. Therefore, the decline in earnings could also be the result of this.
However, when we compared Standex International’s growth with the industry we found that while the company’s earnings have been shrinking, the industry has seen an earnings growth of 10% in the same period. This is quite worrisome.
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. This then helps them determine if the stock is placed for a bright or bleak future. Is SXI fairly valued? This infographic on the company’s intrinsic value has everything you need to know.
Is Standex International Efficiently Re-investing Its Profits?
When we piece together Standex International’s low three-year median payout ratio of 22% (where it is retaining 78% of its profits), calculated for the last three-year period, we are puzzled by the lack of growth. The low payout should mean that the company is retaining most of its earnings and consequently, should see some growth. So there could be some other explanations in that regard. For example, the company’s business may be deteriorating.
Moreover, Standex International 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. Based on the latest analysts’ estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 20%. Therefore, the company’s future ROE is also not expected to change by much with analysts predicting an ROE of 9.4%.
On the whole, we feel that the performance shown by Standex International can be open to many interpretations. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Having said that, looking at current analyst estimates, we found that the company’s earnings growth rate is expected to see a huge improvement. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company.
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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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