Is Somero Enterprises, Inc.'s (LON:SOM) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

By
Simply Wall St
Published
March 22, 2022
AIM:SOM
Source: Shutterstock

Most readers would already be aware that Somero Enterprises' (LON:SOM) stock increased significantly by 10% over the past week. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Somero Enterprises' ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Somero Enterprises

How To 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 Somero Enterprises is:

46% = US$35m ÷ US$76m (Based on the trailing twelve months to December 2021).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.46 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. 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. 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.

Somero Enterprises' Earnings Growth And 46% ROE

Firstly, we acknowledge that Somero Enterprises has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 12% also doesn't go unnoticed by us. Probably as a result of this, Somero Enterprises was able to see a decent net income growth of 13% over the last five years.

As a next step, we compared Somero Enterprises' 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 7.8%.

past-earnings-growth
AIM:SOM Past Earnings Growth March 22nd 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 SOM? You can find out in our latest intrinsic value infographic research report.

Is Somero Enterprises Making Efficient Use Of Its Profits?

Somero Enterprises has a significant three-year median payout ratio of 50%, meaning that it is left with only 50% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Moreover, Somero Enterprises is determined to keep sharing its profits with shareholders which we infer from its long history of nine years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 50%.

Conclusion

Overall, we are quite pleased with Somero Enterprises' performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Somero Enterprises and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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