Arcus ASA's (OB:ARCUS) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

By
Simply Wall St
Published
May 31, 2021
Source: Shutterstock

With its stock down 5.3% over the past three months, it is easy to disregard Arcus (OB:ARCUS). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Arcus' 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Arcus

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 Arcus is:

10% = kr171m ÷ kr1.6b (Based on the trailing twelve months to March 2021).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every NOK1 worth of equity, the company was able to earn NOK0.10 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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.

Arcus' Earnings Growth And 10% ROE

At first glance, Arcus seems to have a decent ROE. Especially when compared to the industry average of 8.2% the company's ROE looks pretty impressive. Probably as a result of this, Arcus was able to see an impressive net income growth of 30% over the last five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Arcus' 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 5.5%.

past-earnings-growth
OB:ARCUS Past Earnings Growth June 1st 2021

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Arcus''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Arcus Using Its Retained Earnings Effectively?

Arcus' significant three-year median payout ratio of 67% (where it is retaining only 33% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.

Additionally, Arcus has paid dividends over a period of four years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we feel that Arcus' performance has been quite good. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Arcus and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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