Stock Analysis

Has Hydratec Industries NV's (AMS:HYDRA) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

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ENXTAM:HYDRA
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Most readers would already be aware that Hydratec Industries' (AMS:HYDRA) stock increased significantly by 22% over the past 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 Hydratec Industries' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Hydratec Industries

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Hydratec Industries is:

7.5% = €4.6m ÷ €62m (Based on the trailing twelve months to June 2020).

The 'return' is the profit over the last twelve months. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.08.

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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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 Hydratec Industries' Earnings Growth And 7.5% ROE

On the face of it, Hydratec Industries' ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 8.1%. Having said that, Hydratec Industries has shown a meagre net income growth of 5.0% over the past five years. Remember, the company's ROE is not particularly great to begin with. So this could also be one of the reasons behind the company's low growth in earnings.

Next, on comparing Hydratec Industries' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 5.0% in the same period.

past-earnings-growth
ENXTAM:HYDRA Past Earnings Growth December 30th 2020

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Hydratec Industries''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hydratec Industries Making Efficient Use Of Its Profits?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. We infer that the company has been reinvesting all of its profits to grow its business.

Summary

Overall, we feel that Hydratec Industries certainly does have some positive factors to consider. Namely, its respectable earnings growth, which it achieved due to it retaining most of its profits. However, given the low ROE, investors may not be benefitting from all that reinvestment after all. 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 Hydratec Industries.

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About ENXTAM:HYDRA

Hydratec Industries

Hydratec Industries NV, through its subsidiaries, engages in the manufacture and sale of industrial systems and plastic components for food, health, and mobility markets in the Netherlands, rest of Europe, Asia, North America, South America, Africa, and Oceania.

Excellent balance sheet with solid track record and pays a dividend.