Stock Analysis

Neurosoft Software Production S.A.'s (BIT:NRST) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

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BIT:NRST
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With its stock down 24% over the past three months, it is easy to disregard Neurosoft Software Production (BIT:NRST). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Neurosoft Software Production's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Neurosoft Software Production

How To 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 Neurosoft Software Production is:

44% = €2.0m ÷ €4.6m (Based on the trailing twelve months to June 2022).

The 'return' is the income the business earned over the last year. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.44.

Why Is ROE Important For 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 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.

A Side By Side comparison of Neurosoft Software Production's Earnings Growth And 44% ROE

First thing first, we like that Neurosoft Software Production has an impressive ROE. Secondly, even when compared to the industry average of 14% the company's ROE is quite impressive. However, for some reason, the higher returns aren't reflected in Neurosoft Software Production's meagre five year net income growth average of 3.3%. This is interesting as the high returns should mean that the company has the ability to generate high growth but for some reason, it hasn't been able to do so. Such a scenario is likely to take place when a company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

As a next step, we compared Neurosoft Software Production's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 19% in the same period.

past-earnings-growth
BIT:NRST Past Earnings Growth September 23rd 2022

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. Is Neurosoft Software Production fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Neurosoft Software Production Using Its Retained Earnings Effectively?

Neurosoft Software Production doesn't pay any dividend, meaning that potentially all of its profits are being reinvested in the business. This doesn't explain the low earnings growth number that we discussed above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Conclusion

In total, it does look like Neurosoft Software Production has some positive aspects to its business. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. 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 Neurosoft Software Production.

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About BIT:NRST

Neurosoft Software Production

Neurosoft Software Production S.A., a software production and ICT company, designs, develops, customizes, and maintains integrated software systems in the areas of Fintech and analytics, systems engineering, and cyber security operations in Greece and internationally.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation4
Future Growth0
Past Performance3
Financial Health5
Dividends0

Read more about these checks in the individual report sections or in our analysis model.

Excellent balance sheet and good value.