EXEL Industries (EPA:EXE) has had a strong run in the stock market with a significant 25% rise in its stock over the past three months. Since stock prices are usually aligned with a company’s financial performance over the long term, we decided to take a closer look at its financial indicators to see if they had a role to play in the recent price movement. . Concretely, we decided to study the ROE of EXEL Industries in this article.
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.
See our latest analysis for EXEL Industries
How do you calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, EXEL Industries’ ROE is:
12% = €44m ÷ €361m (based on the last twelve months until September 2021).
“Yield” is the income the business has earned over the past year. This means that for every €1 of equity, the company generated €0.12 of profit.
What does ROE have to do with earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. 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.
Growth in results and 12% ROE at EXEL Industries
A priori, EXEL Industries seems to have a respectable ROE. Additionally, the company’s ROE compares quite favorably to the industry average of 4.2%. For this reason, the 18% drop in net profit of EXEL Industries over five years raises the question of why the high ROE has not translated into profit growth. We feel there could be other factors at play here that are preventing the company from growing. These include poor revenue retention or poor capital allocation.
Next, we compared the performance of EXEL Industries with that of the industry and found that the performance of EXEL Industries is depressing even compared to the industry, which decreased its profits at a rate of 0.7% in over the same period, which is slower than the company.
Earnings growth is an important metric to consider when evaluating a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or ominous. Has the market priced EXE’s future prospects? You can find out in our latest infographic research report on intrinsic value.
Does EXEL Industries make effective use of its retained earnings?
EXEL Industries’ low three-year median payout rate of 20% (or an 80% retention rate) over the past three years should mean that the company retains most of its profits to fuel its growth, but the company’s profits actually declined. This should generally not be the case when a company retains most of its profits. So there could be other explanations for this. For example, the company’s business may deteriorate.
Additionally, EXEL Industries has paid dividends over a period of at least ten years, suggesting that maintaining dividend payments is far more important to management, even if it comes at the expense of business growth. business. After reviewing the latest analyst consensus data, we found that the company is expected to continue to pay out about 23% of its earnings over the next three years. Thus, forecasts suggest that the future ROE of EXEL Industries will be 11%, which is again similar to the current ROE.
All in all, it seems that EXEL Industries has some positive aspects to its business. 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 being the case, the latest forecasts from industry analysts show that analysts are expecting a huge improvement in the company’s earnings growth rate. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
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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.