Lindsay Australia Limited's (ASX:LAU) Stock Going Strong But Fundamentals Look Weak: What Implications Could This Have On The Stock?

Most readers would already be aware that Lindsay Australia's (ASX:LAU) stock increased significantly by 11% over the past three months. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimatley dictates market outcomes. Specifically, we decided to study Lindsay Australia's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Lindsay Australia

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 Lindsay Australia is:

5.8% = AU$5.3m ÷ AU$92m (Based on the trailing twelve months to June 2020).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.06 in profit.

Why Is ROE Important For 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Lindsay Australia's Earnings Growth And 5.8% ROE

At first glance, Lindsay Australia's ROE doesn't look very promising. Next, when compared to the average industry ROE of 7.3%, the company's ROE leaves us feeling even less enthusiastic. Accordingly, Lindsay Australia's low net income growth of 2.5% over the past five years can possibly be explained by the low ROE amongst other factors.

As a next step, we compared Lindsay Australia's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 5.4% in the same period.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Lindsay Australia fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Lindsay Australia Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 70% (or a retention ratio of 30%), most of Lindsay Australia's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

In addition, Lindsay Australia has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business 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 61%. However, Lindsay Australia's ROE is predicted to rise to 9.9% despite there being no anticipated change in its payout ratio.

Conclusion

On the whole, Lindsay Australia's performance is quite a big let-down. As a result of its low ROE and lack of mich reinvestment into the business, the company has seen a disappointing earnings growth rate. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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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