Openjobmetis S.p.A.'s (BIT:OJM) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Most readers would already be aware that Openjobmetis' (BIT:OJM) stock increased significantly by 15% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Openjobmetis' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Openjobmetis

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Openjobmetis is:

6.0% = €6.2m ÷ €104m (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.06 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

A Side By Side comparison of Openjobmetis' Earnings Growth And 6.0% ROE

When you first look at it, Openjobmetis' ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 4.2%, is definitely interesting. This certainly adds some context to Openjobmetis' moderate 8.1% net income growth seen over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Hence there might be some other aspects that are causing earnings to grow. E.g the company has a low payout ratio or could belong to a high growth industry.

As a next step, we compared Openjobmetis' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 8.1% in the same period.

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. What is OJM worth today? The intrinsic value infographic in our free research report helps visualize whether OJM is currently mispriced by the market.

Is Openjobmetis Using Its Retained Earnings Effectively?

With a three-year median payout ratio of 28% (implying that the company retains 72% of its profits), it seems that Openjobmetis is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

While Openjobmetis has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 25% of its profits over the next three years. Still, forecasts suggest that Openjobmetis' future ROE will rise to 8.8% even though the the company's payout ratio is not expected to change by much.

Summary

In total, we are pretty happy with Openjobmetis' performance. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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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