The fundamentals of Globant SA (NYSE: GLOB) seem pretty solid: could the market be wrong about the stock?
With its stock down 11% over the past week, it’s easy to overlook Globant (NYSE: GLOB). However, the fundamentals of the company look pretty decent, and long-term financial data is generally aligned with future movements in market prices. Specifically, we decided to study Globant’s ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. Simply put, it is used to assess a company’s profitability against its equity.
See our latest review for Globant
How is the ROE calculated?
The return on equity formula is:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, the ROE for Globant is:
5.9% = US $ 73 million Ã· US $ 1.2 billion (based on the last twelve months to June 2021).
The “return” is the annual profit. This means that for every dollar in shareholders’ equity, the company generated $ 0.06 in profit.
What is the relationship between ROE and profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. We now need to assess the profits that the business is reinvesting or âwithholdingâ for future growth, which then gives us an idea of ââthe growth potential of the business. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.
A side-by-side comparison of Globant’s 5.9% profit growth and ROE
At first glance, Globant’s ROE does not look very promising. We then compared the company’s ROE to that of the industry as a whole and were disappointed to find that the ROE is 17% below the industry average. However, the moderate 15% net income growth observed by Globant over the past five years is certainly positive. We think there might be other factors at play here. For example, the business has a low payout ratio or is managed efficiently.
We then performed a comparison between Globant’s net income growth with industry, which found that the company’s growth is similar to the industry’s average growth of 15% over the same period.
Profit growth is a huge factor in the valuation of stocks. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. In doing so, he will have an idea if the action is heading for clear blue waters or swampy waters ahead. Is Globant just valued over other companies? These 3 evaluation measures could help you decide.
Is Globant Using Profits Effectively?
Globant does not currently pay any dividends, which essentially means that it has reinvested all of its profits back into the business. It certainly contributes to the decent profit growth figure we discussed above.
All in all, it seems that Globant has positive aspects for its business. Despite its low rate of return, the fact that the company reinvested a very large portion of its profits back into its business has undoubtedly contributed to the strong profit growth. That said, looking at current analysts’ estimates, we found that the company’s earnings are expected to accelerate. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.
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.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.