Do Its Financials Have Any Role To Play In Driving InfraCom Group AB (publ)'s (NGM:INFRA) Stock Up Recently?

By
Simply Wall St
Published
October 26, 2021
NGM:INFRA
Source: Shutterstock

Most readers would already be aware that InfraCom Group's (NGM:INFRA) stock increased significantly by 36% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on InfraCom Group'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for InfraCom Group

How Is ROE Calculated?

ROE 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 InfraCom Group is:

14% = kr24m ÷ kr168m (Based on the trailing twelve months to June 2021).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every SEK1 worth of equity, the company was able to earn SEK0.14 in profit.

What Has ROE Got To Do With 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.

InfraCom Group's Earnings Growth And 14% ROE

To begin with, InfraCom Group seems to have a respectable ROE. Be that as it may, the company's ROE is still quite lower than the industry average of 19%. However, we are pleased to see the impressive 30% net income growth reported by InfraCom Group over the past five years. We reckon that there could be other factors at play here. 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. However, not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. So this certainly also provides some context to the high earnings growth seen by the company.

We then compared InfraCom Group's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 10.0% in the same period.

past-earnings-growth
NGM:INFRA Past Earnings Growth October 27th 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. This then helps them determine if the stock is placed for a bright or bleak future. Is InfraCom Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is InfraCom Group Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 77% (implying that it keeps only 23% of profits) for InfraCom Group suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Along with seeing a growth in earnings, InfraCom Group only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Conclusion

Overall, we feel that InfraCom Group certainly does have some positive factors to consider. Specifically, its respectable ROE which likely led to the considerable growth in earnings. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. Up till now, we've only made a short study of the company's growth data. To gain further insights into InfraCom Group's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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