Most readers already know that the stock of ProfilGruppen (STO: PROF B) has increased significantly by 29% in the last three months. But the company’s key financial metrics appear to differ across the board, leading us to question whether the current momentum in the company’s stock price can be sustained. In particular, we will pay particular attention to ProfilGruppen’s ROE today.
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. In simpler terms, it measures a company’s profitability relative to equity.
Check out our latest review for ProfilGruppen
How is the ROE calculated?
the formula for ROE is:
Return on equity = Net income (from continuing operations) Equity
Thus, based on the above formula, ProfilGruppen’s ROE is:
7.9% = kr37m kr466m (based on the last twelve months to June 2021).
The “return” is the income the business has earned over the past year. Another way to look at this is that for every SEK1 value of equity, the company was able to earn SEK0.08 in profit.
What does ROE have to do with profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
Profit growth for ProfilGruppen and 7.9% ROE
At first glance, ProfilGruppen’s ROE is not much to say. However, given that the company’s ROE is similar to the industry average ROE of 7.3%, we can think about it. But ProfilGruppen has seen a five-year net profit decline of 3.2% over the past five years. Keep in mind that the business has a slightly low ROE. Therefore, lower income could also be the result of this.
So, in the next step, we compared ProfilGruppen’s performance to that of the industry and were disappointed to find that as the company reduced its profits, the industry increased its profits at a rate of 4, 0% during 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. 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 ProfilGruppen is trading high P / E or low P / E, relative to its industry.
ProfilGruppen does it reinvest its profits effectively?
Although the company has paid part of its dividend in the past, it currently does not pay any dividends. This implies that potentially all of its profits are reinvested in the business.
All in all, we are a little ambivalent about the performance of ProfilGruppen. Although the company has a high rate of profit retention, its low rate of return is likely to hamper its profit growth. In conclusion, we would proceed with caution with this business and one way to do that would be to look at the risk profile of the business. To learn about the 5 risks we have identified for ProfilGruppen, visit our risk dashboard free of charge.
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This Simply Wall St article is general in nature. 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 material. Simply Wall St has no position in any of the stocks mentioned.
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