Stock Analysis

Will Weakness in Lincoln Educational Services Corporation's (NASDAQ:LINC) Stock Prove Temporary Given Strong Fundamentals?

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NasdaqGS:LINC
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Lincoln Educational Services (NASDAQ:LINC) has had a rough week with its share price down 10%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Lincoln Educational Services' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Lincoln Educational Services

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 Lincoln Educational Services is:

21% = US$12m ÷ US$57m (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.21.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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.

Lincoln Educational Services' Earnings Growth And 21% ROE

To begin with, Lincoln Educational Services seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 8.5%. This probably laid the ground for Lincoln Educational Services' moderate 13% net income growth seen over the past five years.

As a next step, we compared Lincoln Educational Services' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 14% in the same period.

past-earnings-growth
NasdaqGS:LINC Past Earnings Growth December 15th 2020

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Lincoln Educational Services''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Lincoln Educational Services Efficiently Re-investing Its Profits?

Given that Lincoln Educational Services doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Summary

Overall, we are quite pleased with Lincoln Educational 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. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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