Most readers would already be aware that Esautomotion’s (BIT:ESAU) stock increased significantly by 21% over the past three months. But the company’s key financial indicators appear to be differing across the board and that makes us question whether or not the company’s current share price momentum can be maintained. Particularly, we will be paying attention to Esautomotion’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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
How Do You Calculate Return On Equity?
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 Esautomotion is:
6.5% = €997k ÷ €15m (Based on the trailing twelve months to June 2020).
The ‘return’ is the profit over the last twelve months. That means that for every €1 worth of shareholders’ equity, the company generated €0.07 in profit.
Why Is ROE Important For 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 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.
A Side By Side comparison of Esautomotion’s Earnings Growth And 6.5% ROE
When you first look at it, Esautomotion’s ROE doesn’t look that attractive. Yet, a closer study shows that the company’s ROE is similar to the industry average of 6.2%. Having said that, Esautomotion’s five year net income decline rate was 13%. Bear in mind, the company does have a slightly low ROE. So that’s what might be causing earnings growth to shrink.
However, when we compared Esautomotion’s growth with the industry we found that while the company’s earnings have been shrinking, the industry has seen an earnings growth of 3.0% in the same period. This is quite worrisome.
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. Is Esautomotion fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Esautomotion Making Efficient Use Of Its Profits?
Overall, we have mixed feelings about Esautomotion. While the company does have a high rate of reinvestment, the low ROE means…
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