Stock Analysis

Could The Market Be Wrong About LaserBond Limited (ASX:LBL) Given Its Attractive Financial Prospects?

ASX:LBL
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LaserBond (ASX:LBL) has had a rough three months with its share price down 11%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to LaserBond's ROE today.

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.

See our latest analysis for LaserBond

How To Calculate Return On Equity?

Return on equity can be calculated by using the formula:

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

So, based on the above formula, the ROE for LaserBond is:

23% = AU$2.8m ÷ AU$12m (Based on the trailing twelve months to June 2020).

The 'return' is the yearly profit. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.23 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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.

LaserBond's Earnings Growth And 23% ROE

Firstly, we acknowledge that LaserBond has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 11% which is quite remarkable. As a result, LaserBond's exceptional 50% net income growth seen over the past five years, doesn't come as a surprise.

We then compared LaserBond's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 35% in the same period.

past-earnings-growth
ASX:LBL Past Earnings Growth January 11th 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is LBL fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is LaserBond Efficiently Re-investing Its Profits?

The three-year median payout ratio for LaserBond is 41%, which is moderately low. The company is retaining the remaining 59%. So it seems that LaserBond is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Additionally, LaserBond has paid dividends over a period of nine years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 27% over the next three years. As a result, the expected drop in LaserBond's payout ratio explains the anticipated rise in the company's future ROE to 28%, over the same period.

Conclusion

On the whole, we feel that LaserBond's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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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