Should the weakness in Loomis AB (publ) (STO:LOOMIS) shares be taken as a sign that the market will correct the share price given decent financials?
It’s hard to get excited after watching the recent performance of Loomis (STO:LOOMIS), as its stock is down 6.7% in the past month. However, the company’s fundamentals look pretty decent and long-term financials are generally in line with future market price movements. In this article, we decided to focus on Loomis ROE.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest analysis for Loomis
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, Loomis’ ROE is:
11% = 1.1 billion kr ÷ 10 billion kr (based on the last twelve months until December 2021).
“Yield” is the income the business has earned over the past year. This means that for every 1 SEK worth of equity, the company has generated 0.11 SEK of profit.
What does ROE have to do with earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
Loomis earnings growth and ROE of 11%
For starters, Loomis seems to have a respectable ROE. Even when compared to the industry average of 10%, the company’s ROE looks pretty decent. However, although Loomis had a fairly respectable ROE, its five-year net income decline rate was 9.2%. So there could be other aspects that could explain this. For example, the company pays a large portion of its profits in the form of dividends or faces competitive pressures.
That being said, we compared Loomis’ performance with that of the industry and were concerned when we found that while the company had cut profits, the industry had increased profits at a rate of 9.7%. during the same period.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This then helps them determine if the stock is positioned for a bright or bleak future. 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 Loomis is trading on a high P/E or on a low P/E, relative to its industry.
Is Loomis effectively using its retained earnings?
Despite a three-year normal median payout rate of 48% (i.e. a retention rate of 52%), the fact that Loomis’ earnings have declined is quite puzzling. So there could be other explanations for this. For example, the company’s business may deteriorate.
Additionally, Loomis has paid dividends over a period of at least ten years, which means the company’s management is committed to paying dividends even if it means little or no earnings growth. Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to remain stable at 46%. Still, forecasts suggest that Loomis’ future ROE will hit 18%, even though the company’s payout ratio isn’t expected to change much.
Overall, we think Loomis certainly has some positives to consider. Still, the weak earnings growth is a bit of a concern, especially since the company has a high rate of return and reinvests a huge portion of its earnings. At first glance, there could be other factors, which do not necessarily control the business, that are preventing growth. That said, we studied the latest analyst forecasts and found that while the company has cut earnings in the past, analysts expect earnings to increase in the future. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.
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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.