Will Weakness in Systemax Inc.’s (NYSE:SYX) Stock Prove Temporary Given Strong Fundamentals?

Systemax (NYSE:SYX) has had a rough three months with its share price down 15%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Systemax’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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Systemax

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 Systemax is:

35% = US$48m ÷ US$138m (Based on the trailing twelve months to March 2020).

The ‘return’ is the income the business earned over the last year. That means that for every $1 worth of shareholders’ equity, the company generated $0.35 in profit.

What Is The Relationship Between ROE And 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.

Systemax’s Earnings Growth And 35% ROE

To begin with, Systemax has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 11% the company’s ROE is quite impressive. As a result, Systemax’s exceptional 57% net income growth seen over the past five years, doesn’t come as a surprise.

As a next step, we compared Systemax’s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 16%.

NYSE:SYX Past Earnings Growth May 20th 2020
NYSE:SYX Past Earnings Growth May 20th 2020

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock’s future looks promising or ominous. If you’re wondering about Systemax’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Systemax Making Efficient Use Of Its Profits?

The three-year median payout ratio for Systemax is 27%, which is moderately low. The company is retaining the remaining 73%. By the looks of it, the dividend is well covered and Systemax is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Systemax is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend.

Conclusion

In total, we are pretty happy with Systemax’s performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. 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 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. Thank you for reading.