With its stock down 15% in the past three months, it’s easy to overlook the Clemondo Group (STO:CLEM). But if you pay close attention, you might find that its leading financial indicators look pretty decent, which could mean the stock could potentially rise in the long run as markets generally reward more resilient long-term fundamentals. In particular, today we will pay particular attention to the ROE of Clemondo Group.
Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In simple terms, it is used to assess the profitability of a company in relation to its equity.
Our analysis indicates that CLEM is potentially undervalued!
How do you calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Clemondo Group is:
4.7% = 4.7 million kr ÷ 99 million kr (based on the last twelve months to June 2022).
“Yield” is the income the business has earned over the past year. Another way to think about this is that for every 1 SEK worth of equity, the company was able to make a profit of 0.05 SEK.
What does ROE have to do with earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate relative to companies that don’t necessarily exhibit these characteristics.
A side-by-side comparison of the Clemondo Group’s earnings growth and ROE of 4.7%
At first glance, the Clemondo Group’s ROE does not look so attractive. We then compared the company’s ROE to the entire industry and were disappointed to see that the ROE is below the industry average of 6.4%. However, we are pleasantly surprised to see that the Clemondo Group has increased its net profit at a significant rate of 55% over the past five years. Thus, there could be other aspects that positively influence the profit growth of the company. Such as – high revenue retention or effective management in place.
As a next step, we benchmarked Clemondo Group’s net income growth against the industry, and luckily we found that the growth the company saw was above the industry average growth of 13%.
Earnings growth is an important factor in stock valuation. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This will help them determine if the future of the title looks bright or ominous. If you’re wondering about Clemondo Group’s valuation, check out this indicator of its price-earnings ratio, relative to its sector.
Is the Clemondo Group using its retained earnings effectively?
The Clemondo Group currently pays no dividends, which essentially means that it has reinvested all of its profits back into the business. This certainly contributes to the high earnings growth number we discussed above.
All in all, it seems that Clemondo Group has positive aspects in its business. Even despite the low rate of return, the company has shown impressive earnings growth thanks to massive reinvestment in its business. That said, the latest forecasts from industry analysts show that the company’s earnings growth is expected to slow. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.
Valuation is complex, but we help make it simple.
Find out if Clemondo Group is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.
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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.