EVI Industries' (NYSEMKT:EVI) stock is up by a considerable 26% over the past three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. In this article, we decided to focus on EVI Industries' ROE.
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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for EVI Industries is:
0.8% = US$713k ÷ US$89m (Based on the trailing twelve months to September 2020).
The 'return' is the income the business earned over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.01 in profit.
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. 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. 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.
EVI Industries' Earnings Growth And 0.8% ROE
It is hard to argue that EVI Industries' ROE is much good in and of itself. Not just that, even compared to the industry average of 9.7%, the company's ROE is entirely unremarkable. Therefore, the disappointing ROE therefore provides a background to EVI Industries' very little net income growth of 2.2% over the past five years.
Next, on comparing with the industry net income growth, we found that EVI Industries' reported growth was lower than the industry growth of 15% in the same period, which is not something we like to see.
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. If you're wondering about EVI Industries''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is EVI Industries Using Its Retained Earnings Effectively?
EVI Industries doesn't pay any dividend, which means that it is retaining all of its earnings. This doesn't explain the low earnings growth number that we discussed above. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
Overall, we have mixed feelings about EVI Industries. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. Our risks dashboard would have the 2 risks we have identified for EVI Industries.
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EVI Industries, Inc., through its subsidiaries, distributes, sells, rents, and leases commercial and industrial laundry and dry-cleaning equipment, and steam and hot water boilers in the United States, Canada, the Caribbean, and Latin America.
Adequate balance sheet with questionable track record.