What implications could this have on the stock?
Symbio Holdings (ASX: SYM) has had a strong run in the equity market with its stock rising significantly 11% in the past three months. However, we wanted to take a closer look at its key financial indicators as markets typically pay for long-term fundamentals, and in this case, they don’t look very promising. In this article, we have decided to focus on the ROE of Symbio Holdings.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. Simply put, it is used to assess a company’s profitability against its equity.
Check out our latest analysis for Symbio Holdings
How to calculate return on equity?
The formula for ROE is:
Return on equity = Net income (from continuing operations) Ã· Equity
Thus, based on the above formula, the ROE of Symbio Holdings is:
7.9% = A $ 12 million Ã· A $ 150 million (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 Australian dollar of registered capital it has, the company has made 0.08 Australian dollars 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 how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate than companies that do not have the same characteristics.
A side-by-side comparison of Symbio Holdings’ 7.9% profit growth and ROE
At first glance, Symbio Holdings’ ROE isn’t much to say. Still, further study shows that the company’s ROE is similar to the industry average of 7.6%. That said, Symbio Holdings has posted weak net income growth of 2.0% over the past five years. Keep in mind that the company’s ROE is not that high. Therefore, this provides some context for the weak earnings growth seen by the company.
As a next step, we compared Symbio Holdings’ net income growth with the industry and were disappointed to see that the company’s growth is below the industry average growth of 9.6% over the course of the same period.
Profit growth is an important metric to consider when valuing a stock. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This will help them determine whether the future of the stock looks bright or threatening. Is the SYM valued enough? This intrinsic business value infographic has everything you need to know.
Is Symbio Holdings using its profits efficiently?
The high 51% three-year median payout rate (i.e. the company only keeps 49% of its revenue) over the past three years for Symbio Holdings suggests that the growth in the company’s earnings was lower due to the payment of a majority of his earnings.
Additionally, Symbio Holdings has been paying dividends for at least ten years or more, suggesting that management must have perceived that shareholders prefer dividends over 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 hold steady at 42%. Still, forecasts suggest that Symbio Holdings’ future ROE will increase to 13% even though the company’s payout ratio is not expected to change much.
Overall, the performance of Symbio Holdings is quite disappointing. Due to its low ROE and lack of reinvestment in the business, the company recorded a disappointing rate of 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 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. 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 any stock 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 any of the stocks mentioned.