Are Strong Financial Prospects The Force That Is Driving The Momentum In The Lexington Company AB (publ)'s STO:LEX) Stock?

By
Simply Wall St
Published
November 08, 2021
Source: Shutterstock

Most readers would already be aware that Lexington Company's (STO:LEX) stock increased significantly by 16% over the past week. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Lexington Company's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Lexington Company

How Is ROE Calculated?

Return on equity can be calculated by using the formula:

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

So, based on the above formula, the ROE for Lexington Company is:

22% = kr17m ÷ kr78m (Based on the trailing twelve months to June 2021).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every SEK1 worth of equity, the company was able to earn SEK0.22 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. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Lexington Company's Earnings Growth And 22% ROE

To begin with, Lexington Company has a pretty high ROE which is interesting. Further, even comparing with the industry average if 19%, the company's ROE is quite respectable. As a result, Lexington Company's remarkable 32% net income growth seen over the past 5 years is likely aided by its high ROE.

Given that the industry shrunk its earnings at a rate of 5.1% in the same period, the net income growth of the company is quite impressive.

past-earnings-growth
OM:LEX Past Earnings Growth November 9th 2021

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is LEX worth today? The intrinsic value infographic in our free research report helps visualize whether LEX is currently mispriced by the market.

Is Lexington Company Making Efficient Use Of Its Profits?

Lexington Company doesn't pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what's driving the high earnings growth number discussed above.

Summary

In total, we are pretty happy with Lexington Company's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. You can see the 3 risks we have identified for Lexington Company by visiting our risks dashboard for free on our platform here.

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