Is EnerSys (NYSE: ENS) mixed financial data the reason for its sluggish stock market performance?
EnerSys (NYSE: ENS) had a rough three-month period with its stock price down 23%. It seems that the market has completely ignored the positive aspects of the company’s fundamentals and decided to weigh more heavily on the negative aspects. Fundamentals usually dictate market outcomes, so it makes sense to study company finances. In particular, we will pay particular attention to the ROE of EnerSys today.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.
Check out our latest analysis for EnerSys
How to calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, the ROE for EnerSys is:
9.7% = US $ 152 million Ã· US $ 1.6 billion (based on the last twelve months to July 2021).
The “return” is the income the business has earned over the past year. Another way of thinking is that for every dollar of equity, the company was able to make $ 0.10 in profit.
Why is ROE important for profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future 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.
EnerSys profit growth and ROE of 9.7%
At first glance, the ROE of EnerSys does not look very promising. A quick follow-up study shows that the company’s ROE also does not compare favorably to the industry average of 13%. As a result, EnerSys’ stable net income growth over the past five years is not surprising given its lower ROE.
As a next step, we compared EnerSys’ net income growth with that of the industry and found that the industry experienced an average growth of 7.1% over the same period.
Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are ahead of them. 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 EnerSys is trading high P / E or low P / E, relative to its industry.
Is EnerSys effectively reinvesting its profits?
EnerSys has a low three-year median payout ratio of 20% (or an 80% retention rate), but the negligible profit growth figure does not reflect this, as high growth typically follows high profit retention.
Additionally, EnerSys has been paying dividends for eight years, which is a considerable amount of time, suggesting that management must have perceived that shareholders prefer dividends over earnings growth.
All in all, we are a little ambivalent about the performance of EnerSys. Although the company has a high reinvestment rate, the low ROE means that all that reinvestment is not benefiting its investors and, moreover, it has a negative impact on profit growth. That said, looking at current analysts’ estimates, we found that the company’s earnings growth rate is expected to see a huge improvement. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. 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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