Saab AB (publ)'s (STO:SAAB B) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

By
Simply Wall St
Published
September 23, 2021
OM:SAAB B
Source: Shutterstock

Most readers would already be aware that Saab's (STO:SAAB B) stock increased significantly by 12% 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. Particularly, we will be paying attention to Saab's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Saab

How Is ROE Calculated?

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 Saab is:

5.1% = kr1.1b ÷ kr23b (Based on the trailing twelve months to June 2021).

The 'return' is the yearly profit. Another way to think of that is that for every SEK1 worth of equity, the company was able to earn SEK0.05 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Saab's Earnings Growth And 5.1% ROE

When you first look at it, Saab's ROE doesn't look that attractive. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 9.4% either. Therefore, Saab's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

As a next step, we compared Saab's 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 1.1% in the same period.

past-earnings-growth
OM:SAAB B Past Earnings Growth September 23rd 2021

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for SAAB B? You can find out in our latest intrinsic value infographic research report.

Is Saab Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 52% (implying that the company keeps only 48% of its income) of its business to reinvest into its business), most of Saab's profits are being paid to shareholders, which explains the absence of growth in earnings.

Moreover, Saab 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. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 34% over the next three years. As a result, the expected drop in Saab's payout ratio explains the anticipated rise in the company's future ROE to 10%, over the same period.

Conclusion

In total, we're a bit ambivalent about Saab's performance. While the company has posted a decent earnings growth, We do feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings at a higher rate of return. 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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