Should Weakness in M.O.B.A. Network AB (publ)'s (STO:MOBA) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

By
Simply Wall St
Published
February 22, 2022
OM:MOBA
Source: Shutterstock

With its stock down 14% over the past week, it is easy to disregard M.O.B.A. Network (STO:MOBA). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to M.O.B.A. Network's ROE today.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for M.O.B.A. Network

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 M.O.B.A. Network is:

6.4% = kr16m ÷ kr248m (Based on the trailing twelve months to December 2021).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every SEK1 worth of equity, the company was able to earn SEK0.06 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

M.O.B.A. Network's Earnings Growth And 6.4% ROE

At first glance, M.O.B.A. Network's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 6.4%, we may spare it some thought. Looking at M.O.B.A. Network's exceptional 45% five-year net income growth in particular, we are definitely impressed. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared M.O.B.A. Network'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 63% in the same period.

past-earnings-growth
OM:MOBA Past Earnings Growth February 22nd 2022

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 M.O.B.A. Network fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is M.O.B.A. Network Using Its Retained Earnings Effectively?

M.O.B.A. Network doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Conclusion

On the whole, we do feel that M.O.B.A. Network has some positive attributes. 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. You can see the 5 risks we have identified for M.O.B.A. Network by visiting our risks dashboard for free on our platform here.

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