Stock Analysis

Could The Market Be Wrong About secunet Security Networks Aktiengesellschaft (ETR:YSN) Given Its Attractive Financial Prospects?

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XTRA:YSN
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With its stock down 4.7% over the past week, it is easy to disregard secunet Security Networks (ETR:YSN). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study secunet Security Networks' ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for secunet Security Networks

How Do You 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 secunet Security Networks is:

35% = €37m ÷ €107m (Based on the trailing twelve months to June 2022).

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 Has ROE Got To Do With 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. 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.

secunet Security Networks' Earnings Growth And 35% ROE

To begin with, secunet Security Networks has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 13% also doesn't go unnoticed by us. Under the circumstances, secunet Security Networks' considerable five year net income growth of 25% was to be expected.

Next, on comparing with the industry net income growth, we found that secunet Security Networks' growth is quite high when compared to the industry average growth of 17% in the same period, which is great to see.

past-earnings-growth
XTRA:YSN Past Earnings Growth December 7th 2022

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. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for YSN? You can find out in our latest intrinsic value infographic research report.

Is secunet Security Networks Efficiently Re-investing Its Profits?

The three-year median payout ratio for secunet Security Networks is 42%, which is moderately low. The company is retaining the remaining 58%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like secunet Security Networks is reinvesting its earnings efficiently.

Additionally, secunet Security Networks has paid dividends over a period of nine years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 59% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.

Summary

Overall, we are quite pleased with secunet Security Networks' performance. 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. 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.

Valuation is complex, but we're helping make it simple.

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