UniVision Engineering Limited's (LON:UVEL) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

UniVision Engineering's (LON:UVEL) stock is up by a considerable 145% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to UniVision Engineering's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for UniVision Engineering

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 UniVision Engineering is:

7.8% = UK£668k ÷ UK£8.6m (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. That means that for every £1 worth of shareholders' equity, the company generated £0.08 in profit.

What Is The Relationship Between ROE And 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

UniVision Engineering's Earnings Growth And 7.8% ROE

When you first look at it, UniVision Engineering's ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 7.7%, we may spare it some thought. Moreover, we are quite pleased to see that UniVision Engineering's net income grew significantly at a rate of 28% over the last five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared UniVision Engineering'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 15%.

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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about UniVision Engineering's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is UniVision Engineering Using Its Retained Earnings Effectively?

UniVision Engineering's three-year median payout ratio to shareholders is 22%, which is quite low. This implies that the company is retaining 78% of its profits. So it looks like UniVision Engineering is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, UniVision Engineering has been paying dividends over a period of seven years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

On the whole, we do feel that UniVision Engineering has some positive attributes. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 3 risks we have identified for UniVision Engineering by visiting our risks dashboard for free on our platform here.

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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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