Better Collective A/S (STO:BETCO) stock has shown weakness lately, but the financial outlook looks decent: is the market wrong?
It’s hard to get excited after watching the recent performance of Better Collective (STO:BETCO), as its stock is down 12% in the past three months. However, the company’s fundamentals look pretty decent and long-term financial data is generally in line with future market price movements. In particular, we’ll be paying attention to Better Collective’s ROE today.
Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
See our latest analysis for Better Collective
How do you calculate return on equity?
the return on equity formula East:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Better Collective is:
4.5% = €15m ÷ €335m (based on the last twelve months until September 2021).
The “yield” is the profit of the last twelve months. This therefore means that for every investment of 1 SEK by its shareholder, the company generates a profit of 0.04 SEK.
What does ROE have to do with earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
Better Collective earnings growth and ROE of 4.5%
At first glance, Better Collective’s ROE does not look very promising. Then, compared to the industry average ROE of 5.9%, the company’s ROE leaves us even less excited. Despite this, Better Collective has been able to grow its bottom line significantly, at a rate of 35% over the past five years. Thus, there could be other aspects that positively influence the profit growth of the company. Such as – high revenue retention or effective management in place.
As a next step, we benchmarked Better Collective’s net income growth against the industry and were disappointed to see that the company’s growth is below the industry average growth of 65% over the course of the year. same period.
Earnings growth is an important factor in stock valuation. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This will help them determine if the future of the title looks bright or ominous. A good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. Thus, you might want to check whether Better Collective is trading on a high P/E or a low P/E, relative to its industry.
Does Better Collective effectively reinvest its profits?
Since Better Collective does not pay any dividends to its shareholders, we infer that the company has reinvested all of its profits to grow its business.
All in all, it seems that Better Collective has positive aspects for its activity. In other words, decent earnings growth supported by a high rate of reinvestment. However, we believe that this earnings growth could have been higher if the company were to improve the low ROE rate. Especially considering how the company reinvests a huge portion of its profits. While we wouldn’t completely dismiss the business, what we would do is try to figure out how risky the business is to make a more informed decision about the business. Our risk dashboard would have the 4 risks we identified for Better Collective.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.