WestStar Industrial Limited's (ASX:WSI) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

With its stock down 13% over the past three months, it is easy to disregard WestStar Industrial (ASX:WSI). 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. Specifically, we decided to study WestStar Industrial'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for WestStar Industrial

How Is ROE Calculated?

ROE 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 WestStar Industrial is:

26% = AU$3.5m ÷ AU$13m (Based on the trailing twelve months to June 2020).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.26 in profit.

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. 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.

WestStar Industrial's Earnings Growth And 26% ROE

Firstly, we acknowledge that WestStar Industrial has a significantly high ROE. Secondly, even when compared to the industry average of 13% the company's ROE is quite impressive. As a result, WestStar Industrial's exceptional 79% net income growth seen over the past five years, doesn't come as a surprise.

Next, on comparing with the industry net income growth, we found that WestStar Industrial's growth is quite high when compared to the industry average growth of 32% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is WestStar Industrial fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is WestStar Industrial Efficiently Re-investing Its Profits?

Conclusion

On the whole, we feel that WestStar Industrial's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. You can see the 2 risks we have identified for WestStar Industrial by visiting our risks dashboard for free on our platform here.

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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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