Ringmetall (ETR: HP3) has seen good progress in the equity market with a stock up 17% in the past month. Since stock prices are generally aligned with a company’s long-term financial performance, we decided to take a closer look at its financial metrics to see if they had a role to play in recent price movements. . In this article, we have decided to focus on Ringmetall’s ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it has received from its shareholders. Simply put, it is used to assess a company’s profitability against its equity.
See our latest review for Ringmetall
How to calculate return on equity?
the return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, Ringmetall’s ROE is:
5.5% = € 2.7 M ÷ € 50 M (Based on the last twelve months until December 2020).
The “return” is the profit of the last twelve months. This means that for every € 1 of equity, the company generated € 0.06 in profit.
What does ROE have to do with profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
A side-by-side comparison of Ringmetall’s profit growth and 5.5% ROE
At first glance, Ringmetall’s ROE doesn’t look very promising. However, given that the company’s ROE is similar to the industry average ROE of 6.1%, we can think about it. Still, Ringmetall has experienced steady net income growth over the past five years. Keep in mind that the company’s ROE is not that high. So this could also be one of the reasons for the weak profit growth of the company.
We then compared Ringmetall’s net income growth to that of the industry and found that the industry had shrunk at a rate of 1.5% over the same period, which improves the growth of the business somewhat.
Profit growth is an important metric to consider when valuing a stock. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This then helps them determine whether the stock is set for a bright or gloomy future. Has the market taken into account the future prospects of HP3? You can find out in our latest Intrinsic Value infographic research report.
Is Ringmetall Efficiently Using Its Retained Earnings?
Despite a normal three-year median payout rate of 48% (or retention rate of 52%), Ringmetall hasn’t seen much profit growth. Therefore, there could be other reasons for the lack in this regard. For example, the business could be in decline.
Additionally, Ringmetall has paid dividends over a period of at least ten years, suggesting that sustaining dividend payments is much more important to management, even if it comes at the expense of growing the business. . Looking at the latest analyst consensus data, we found that the company’s future payout ratio is expected to drop to 26% over the next three years. Thus, the expected drop in the payout ratio explains the expected increase in the company’s ROE to 12% over the same period.
All in all, it seems that Ringmetall has some positive aspects for its business. With a high reinvestment rate, but with a low ROE, the company has managed to see considerable growth in earnings. That said, looking at current analysts’ estimates, we saw that the company’s earnings are expected to pick up. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.
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