Is Provide IT Sweden AB (publ)'s (NGM:PROVIT) Stock Price Struggling As A Result Of Its Mixed Financials?

Provide IT Sweden (NGM:PROVIT) has had a rough three months with its share price down 24%. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Particularly, we will be paying attention to Provide IT Sweden's ROE today.

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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Provide IT Sweden

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 Provide IT Sweden is:

23% = kr1.6m ÷ kr7.2m (Based on the trailing twelve months to September 2023).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every SEK1 of its shareholder's investments, the company generates a profit of SEK0.23.

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.

Provide IT Sweden's Earnings Growth And 23% ROE

First thing first, we like that Provide IT Sweden has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 19% which is quite remarkable. Despite this, Provide IT Sweden's five year net income growth was quite low averaging at only 3.6%. This is generally not the case as when a company has a high rate of return it should usually also have a high earnings growth rate. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or or poor allocation of capital.

Next, on comparing with the industry net income growth, we found that Provide IT Sweden's reported growth was lower than the industry growth of 15% over the last few years, which is not something we like to see.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Provide IT Sweden's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Provide IT Sweden Using Its Retained Earnings Effectively?

Provide IT Sweden has a very high three-year median payout ratio of 126%, which suggests that the company is dipping into more than just its profits to pay its dividend and that shows in its low earnings growth number. That's a huge risk in our books. To know the 3 risks we have identified for Provide IT Sweden visit our risks dashboard for free.

Moreover, Provide IT Sweden has been paying dividends for six years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

Overall, we have mixed feelings about Provide IT Sweden. Despite the high ROE, the company has a disappointing earnings growth number, due to its poor rate of reinvestment into its business. 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 Provide IT Sweden 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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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.