Remedy Entertainment Oyj (HEL:REMEDY) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

With its stock down 11% over the past month, it is easy to disregard Remedy Entertainment Oyj (HEL:REMEDY). 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 Remedy Entertainment Oyj's 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 Remedy Entertainment Oyj

How To 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 Remedy Entertainment Oyj is:

24% = €6.6m ÷ €28m (Based on the trailing twelve months to June 2020).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.24 in profit.

Why Is ROE Important For 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 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.

Remedy Entertainment Oyj's Earnings Growth And 24% ROE

Firstly, we acknowledge that Remedy Entertainment Oyj has a significantly high ROE. Secondly, even when compared to the industry average of 18% the company's ROE is quite impressive. So, the substantial 39% net income growth seen by Remedy Entertainment Oyj over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that Remedy Entertainment Oyj's growth is quite high when compared to the industry average growth of 18% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 Remedy Entertainment Oyj's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Remedy Entertainment Oyj Using Its Retained Earnings Effectively?

The three-year median payout ratio for Remedy Entertainment Oyj is 42%, which is moderately low. The company is retaining the remaining 58%. By the looks of it, the dividend is well covered and Remedy Entertainment Oyj is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

While Remedy Entertainment Oyj has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend. 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 36%.

Conclusion

Overall, we are quite pleased with Remedy Entertainment Oyj's 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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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