Does his financial data have a role to play in Concentric AB (publ) (STO: COIC) increasing inventories recently?
Concentric (STO: COIC) had a strong run in the equity market with a significant 14% increase in its shares over the past month. As most know, fundamentals generally guide long-term market price movements, so we decided to look at the company’s key financial metrics today to see if they have a role to play in the recent one. price movement. In this article, we have decided to focus on Concentric’s ROE.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.
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How is the ROE calculated?
the return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Concentric is:
17% = 217 million crowns ÷ 1.3b crowns (based on the last twelve months up to March 2021).
The “return” is the amount earned after tax over the past twelve months. One way to conceptualize this is that for every SEK1 of share capital it has, the company has made a profit of SEK0.17.
What does ROE have to do with profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. 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 Concentric’s profit growth and 17% ROE
At first glance, Concentric seems to have a decent ROE. Additionally, the company’s ROE is similar to the industry average of 17%. Given the circumstances, one can’t help but wonder why Concentric has seen little to no growth over the past five years. Based on this, we believe that there might be other reasons that have not been addressed so far in this article that may be hampering the growth of the business. For example, the company pays out a large portion of its profits as dividends or faces competitive pressures.
As a next step, we compared Concentric’s net income growth with the industry and were disappointed to see that the company’s growth is below the industry average growth of 6.7% over the past year. same period.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This will help them determine whether the future of the stock looks bright or threatening. 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. So, you might want to check if Concentric is trading high P / E or low P / E, relative to its industry.
Is Concentric Using Its Profits Effectively?
Despite a moderate three-year median payout ratio of 32% (meaning the company retains 68% of profits) over the past three years, Concentric’s earnings growth has been more or less stable. So there could be other factors at play here that could potentially hamper growth. For example, the company faced headwinds.
Additionally, Concentric pays dividends over a nine-year period, which suggests that sustaining dividend payments is much more important to management, even if it comes at the expense of growing the business. After studying the latest consensus data from analysts, we found that the company’s future payout ratio is expected to reach 60% over the next three years. Still, forecasts suggest that Concentric’s future ROE will increase to 24% even if the company’s payout ratio is expected to increase. We assume that there could be other characteristics of the company that could be the source of the anticipated growth in the company’s ROE.
Overall, we think Concentric has some positive attributes. Still, the weak earnings growth is a bit of a concern, especially since the company has a high rate of return and is reinvesting a huge chunk of its earnings. At first glance, there could be other factors, which do not necessarily control the business, which are preventing growth. However, the latest analyst forecasts show that the company will continue to see its profits increase. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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