Does aktsiaselts Linda Nektar's (TAL:LINDA) Weak Fundamentals Mean A Downturn In Its Stock Should Be Expected?

aktsiaselts Linda Nektar's (TAL:LINDA) stock is up by 8.6% over the past three months. However, its weak financial performance indicators makes us a bit doubtful if that trend could continue. In this article, we decided to focus on aktsiaselts Linda Nektar's ROE.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for aktsiaselts Linda Nektar

How Do You 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 aktsiaselts Linda Nektar is:

0.8% = €30k ÷ €3.7m (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 €1 worth of equity, the company was able to earn €0.01 in profit.

What Has ROE Got To Do With 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. 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.

A Side By Side comparison of aktsiaselts Linda Nektar's Earnings Growth And 0.8% ROE

It is quite clear that aktsiaselts Linda Nektar's ROE is rather low. Even compared to the average industry ROE of 8.0%, the company's ROE is quite dismal. For this reason, aktsiaselts Linda Nektar's five year net income decline of 54% is not surprising given its lower ROE. However, there could also be other factors causing the earnings to decline. Such as - low earnings retention or poor allocation of capital.

However, when we compared aktsiaselts Linda Nektar's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 5.7% in the same period. This is quite worrisome.

Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about aktsiaselts Linda Nektar's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is aktsiaselts Linda Nektar Making Efficient Use Of Its Profits?

With a LTM (or last twelve month) payout ratio as high as 426%,aktsiaselts Linda Nektar's shrinking earnings don't come as a surprise as the company is paying a dividend which is beyond its means. Paying a dividend beyond their means is usually not viable over the long term. You can see the 3 risks we have identified for aktsiaselts Linda Nektar by visiting our risks dashboard for free on our platform here.

In addition, aktsiaselts Linda Nektar has been paying dividends over a period of five years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline.

Conclusion

Overall, we would be extremely cautious before making any decision on aktsiaselts Linda Nektar. Specifically, it has shown quite an unsatisfactory performance as far as earnings growth is concerned, and a poor ROE and an equally poor rate of reinvestment seem to be the reason behind this inadequate performance. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of aktsiaselts Linda Nektar's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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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