Can Mixed Fundamentals Have A Negative Impact on Excelsior Capital Limited (ASX:ECL) Current Share Price Momentum?

By
Simply Wall St
Published
May 26, 2021
ASX:ECL
Source: Shutterstock

Most readers would already be aware that Excelsior Capital's (ASX:ECL) stock increased significantly by 9.0% over the past month. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. In this article, we decided to focus on Excelsior Capital's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Excelsior Capital

How To Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Excelsior Capital is:

7.5% = AU$3.8m ÷ AU$51m (Based on the trailing twelve months to December 2020).

The 'return' is the yearly profit. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.08.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Excelsior Capital's Earnings Growth And 7.5% ROE

At first glance, Excelsior Capital's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 8.7%, we may spare it some thought. We can see that Excelsior Capital has grown at a five year net income growth average rate of 2.0%, which is a bit on the lower side. Remember, the company's ROE is not particularly great to begin with. Hence, this does provide some context to low earnings growth seen by the company.

Next, on comparing with the industry net income growth, we found that Excelsior Capital's reported growth was lower than the industry growth of 17% in the same period, which is not something we like to see.

past-earnings-growth
ASX:ECL Past Earnings Growth May 26th 2021

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 Excelsior Capital's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Excelsior Capital Using Its Retained Earnings Effectively?

Despite having a normal three-year median payout ratio of 42% (or a retention ratio of 58% over the past three years, Excelsior Capital has seen very little growth in earnings as we saw above. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

In addition, Excelsior Capital has been paying dividends over a period of eight years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

In total, we're a bit ambivalent about Excelsior Capital's performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. Our risks dashboard would have the 2 risks we have identified for Excelsior Capital.

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