Is Perma-Fix Environmental Services, Inc.'s (NASDAQ:PESI) Latest Stock Performance A Reflection Of Its Financial Health?

By
Simply Wall St
Published
March 08, 2021
NasdaqCM:PESI

Perma-Fix Environmental Services' (NASDAQ:PESI) stock is up by a considerable 10% over the past month. 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. In this article, we decided to focus on Perma-Fix Environmental Services' 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. 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 Perma-Fix Environmental Services

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 Perma-Fix Environmental Services is:

13% = US$4.1m ÷ US$32m (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.13 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Perma-Fix Environmental Services' Earnings Growth And 13% ROE

At first glance, Perma-Fix Environmental Services seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 9.4%. This certainly adds some context to Perma-Fix Environmental Services' exceptional 50% net income growth seen over the past five years. However, there could also be other causes behind this growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Perma-Fix Environmental Services' 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 9.5%.

past-earnings-growth
NasdaqCM:PESI Past Earnings Growth March 8th 2021

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 Perma-Fix Environmental Services fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Perma-Fix Environmental Services Making Efficient Use Of Its Profits?

Summary

Overall, we are quite pleased with Perma-Fix Environmental Services' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. You can see the 1 risk we have identified for Perma-Fix Environmental Services by visiting our risks dashboard for free on our platform here.

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This article by Simply Wall St is general in nature. 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.
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