Most readers would already be aware that Scanfil Oyj's (HEL:SCANFL) stock increased significantly by 13% over the past month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Scanfil Oyj'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
How Do You Calculate Return On Equity?
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 Scanfil Oyj is:
25% = €44m ÷ €178m (Based on the trailing twelve months to September 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 €0.25 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 Scanfil Oyj's Earnings Growth And 25% ROE
Firstly, we acknowledge that Scanfil Oyj has a significantly high ROE. Secondly, even when compared to the industry average of 18% the company's ROE is quite impressive. As a result, Scanfil Oyj's exceptional 36% net income growth seen over the past five years, doesn't come as a surprise.
As a next step, we compared Scanfil Oyj's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 25%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is SCANFL fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Scanfil Oyj Making Efficient Use Of Its Profits?
The three-year median payout ratio for Scanfil Oyj is 29%, which is moderately low. The company is retaining the remaining 71%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Scanfil Oyj is reinvesting its earnings efficiently.
Moreover, Scanfil Oyj is determined to keep sharing its profits with shareholders which we infer from its long history of eight years of paying a dividend. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 36% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company's ROE to 15%, over the same period.
On the whole, we feel that Scanfil Oyj's performance has been quite good. 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, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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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