Is Exsitec Holding AB (publ)'s (STO:EXS) Latest Stock Performance A Reflection Of Its Financial Health?

Exsitec Holding (STO:EXS) has had a great run on the share market with its stock up by a significant 13% over the last week. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Exsitec Holding's ROE in this article.

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.

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How To Calculate Return On Equity?

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 Exsitec Holding is:

13% = kr59m ÷ kr457m (Based on the trailing twelve months to December 2024).

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 SEK0.13 in profit.

See our latest analysis for Exsitec Holding

What Is The Relationship Between ROE And 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 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.

Exsitec Holding's Earnings Growth And 13% ROE

To start with, Exsitec Holding's ROE looks acceptable. Even when compared to the industry average of 15% the company's ROE looks quite decent. Consequently, this likely laid the ground for the impressive net income growth of 45% seen over the past five years by Exsitec Holding. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Exsitec Holding's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 19%.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for EXS? You can find out in our latest intrinsic value infographic research report.

Is Exsitec Holding Making Efficient Use Of Its Profits?

Exsitec Holding has a three-year median payout ratio of 32% (where it is retaining 68% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Exsitec Holding is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Exsitec Holding has paid dividends over a period of four years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 33% of its profits over the next three years. Still, forecasts suggest that Exsitec Holding's future ROE will rise to 16% even though the the company's payout ratio is not expected to change by much.

Conclusion

In total, we are pretty happy with Exsitec Holding'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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.