Is ESCO Technologies Inc.’s (NYSE: ESE) recent price movement supported by weak fundamentals?
ESCO Technologies (NYSE: ESE) had a rough three-month period with its share price down 16%. It is possible that the markets ignored the various financial data of the company and decided to look into the negative sentiment. Long-term fundamentals usually determine market performance, so special attention should be paid to them. Specifically, we have decided to study the ROE of ESCO Technologies in this article.
Return on equity or ROE is an important factor for a shareholder to consider, as it tells them how efficiently their capital is being reinvested. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.
How to calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) Ã· Equity
Thus, based on the above formula, the ROE of ESCO Technologies is:
2.1% = US $ 21 million Ã· US $ 1.0 billion (based on the last twelve months to June 2021).
The “return” is the profit of the last twelve months. One way to conceptualize this is that for every $ 1 of shareholder capital it has, the company has made $ 0.02 in profit.
Why is ROE important for profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. We now need to assess how much profit the business is reinvesting or “holding back” for future growth, which then gives us an idea of ââthe growth potential of the business. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
ESCO Technologies profit growth and 2.1% ROE
It is quite clear that the ROE of ESCO Technologies is rather low. Even compared to the industry average of 12%, the ROE figure is quite disappointing. Therefore, it might not be wrong to say that the 4.8% drop in five-year net income seen by ESCO Technologies may have been the result of lower ROE. We believe there could also be other aspects that negatively influence the company’s earnings outlook. Such as – low profit retention or misallocation of capital.
That being said, we compared ESCO Technologies’ performance with that of the industry and we were concerned that although the company reduced its profits, the industry increased its profits at a rate of 8. , 1% over the same period.
NYSE: ESE Past Profit Growth September 23, 2021
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. Has the market taken into account the future prospects of ESE? You can find out in our latest Intrinsic Value infographic research report.
Is ESCO Technologies Efficiently Using Its Retained Earnings?
When we put together ESCO Technologies’ low three-year median payout rate of 12% (where it retains 88% of its profits), calculated for the last three-year period, we are puzzled by the lack of growth. This should generally not be the case when a business keeps most of its profits. It seems that there could be other reasons for the lack in this regard. For example, the business could be in decline.
In addition, ESCO Technologies has paid dividends over a period of at least ten years, which means that the management of the company is committed to paying dividends even if it means little or no growth in earnings.
Overall, we believe that the performance of ESCO Technologies can be open to many interpretations. Although the company has a high rate of profit retention, its low rate of return is likely to hamper its profit growth. However, the latest forecast from industry analysts shows that analysts expect a significant improvement in the company’s earnings growth rate. 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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