As Commercial Industrial Company of Computers and Toys (ATH:ASCO) has had a great run on the share market with its stock up by a significant 15% over the last three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to As Commercial Industrial Company of Computers and Toys' 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.
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for As Commercial Industrial Company of Computers and Toys is:
5.5% = €1.7m ÷ €31m (Based on the trailing twelve months to June 2020).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.06 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. 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. 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.
As Commercial Industrial Company of Computers and Toys' Earnings Growth And 5.5% ROE
It is hard to argue that As Commercial Industrial Company of Computers and Toys' ROE is much good in and of itself. Even compared to the average industry ROE of 17%, the company's ROE is quite dismal. Although, we can see that As Commercial Industrial Company of Computers and Toys saw a modest net income growth of 12% over the past five years. Therefore, the growth in earnings could probably have been caused by other variables. For instance, the company has a low payout ratio or is being managed efficiently.
As a next step, we compared As Commercial Industrial Company of Computers and Toys' 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 6.0%.
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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if As Commercial Industrial Company of Computers and Toys is trading on a high P/E or a low P/E, relative to its industry.
Is As Commercial Industrial Company of Computers and Toys Efficiently Re-investing Its Profits?
On the whole, we do feel that As Commercial Industrial Company of Computers and Toys has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. 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. Our risks dashboard would have the 2 risks we have identified for As Commercial Industrial Company of Computers and Toys.
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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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