Most readers would already be aware that Plaisio Computers' (ATH:PLAIS) stock increased significantly by 37% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. In this article, we decided to focus on Plaisio Computers' ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
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 Plaisio Computers is:
2.3% = €2.1m ÷ €93m (Based on the trailing twelve months to June 2020).
The 'return' is the yearly profit. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.02.
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.
Plaisio Computers' Earnings Growth And 2.3% ROE
It is hard to argue that Plaisio Computers' ROE is much good in and of itself. Even compared to the average industry ROE of 9.9%, the company's ROE is quite dismal. Therefore, it might not be wrong to say that the five year net income decline of 28% seen by Plaisio Computers was possibly a result of it having a lower ROE. We reckon that there could also be other factors at play here. Such as - low earnings retention or poor allocation of capital.
That being said, we compared Plaisio Computers' performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 3.3% in the same period.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. 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 Plaisio Computers is trading on a high P/E or a low P/E, relative to its industry.
Is Plaisio Computers Using Its Retained Earnings Effectively?
Despite having a normal three-year median payout ratio of 31% (where it is retaining 69% of its profits), Plaisio Computers has seen a decline in earnings as we saw above. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
Moreover, Plaisio Computers has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. 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 32%. Regardless, the future ROE for Plaisio Computers is predicted to rise to 4.0% despite there being not much change expected in its payout ratio.
Overall, we have mixed feelings about Plaisio Computers. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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Plaisio Computers S.A., together with its subsidiaries, assembles and trades in PCs, telecommunication and office equipment, and domestic appliances in Greece and Bulgaria.
Flawless balance sheet with solid track record and pays a dividend.