Most readers already know that Saab (STO: SAAB B) stock has risen significantly by 12% in the past 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 be paying close attention to Saab’s ROE today.
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. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.
See our latest analysis for Saab
How is the ROE calculated?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Saab is:
5.1% = kr1.1b kr23b (based on the last twelve months to June 2021).
The “return” is the annual profit. Another way to look at this is that for every SEK1 value of equity, the company was able to earn SEK0.05 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 how much profit the business is reinvesting or “holding back” for future growth, which then gives us an idea of the growth potential of the business. 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.
Saab profit growth and 5.1% ROE
When you first look at it, Saab’s ROE doesn’t look so appealing. A quick follow-up study shows that the company’s ROE also does not compare favorably to the industry average of 9.4%. Therefore, Saab’s stable earnings over the past five years may possibly be explained by the low ROE, among other factors.
In the next step, we compared Saab’s net income growth with the industry and found that the company has a similar growth figure compared to the industry average growth rate of 1.1% over the course of from 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. This will help him determine if the future of the stock looks bright or worrisome. Has the market taken into account the future prospects of SAAB B? You can find out in our latest Intrinsic Value infographic research report.
Is Saab Using Its Retained Earnings Effectively?
With a high three-year median payout rate of 52% (implying that the company only keeps 48% of its revenue) of its business to reinvest in its business), most of Saab’s profits go to shareholders. , which explains the lack of revenue growth.
Additionally, Saab has been paying dividends for at least a decade or more, suggesting that management must have perceived that shareholders prefer dividends over earnings growth. Our latest analyst data shows the company’s future payout ratio is expected to drop to 34% over the next three years. As a result, the expected drop in Saab’s payout ratio explains the expected rise in the company’s future ROE to 10%, over the same period.
All in all, we are a bit ambivalent about Saab’s performance. Although the company showed decent earnings growth, we believe the number of earnings growth could have been even higher if the company had reinvested a larger portion of its earnings at a higher rate of return. However, the latest analyst forecasts show that the company will continue to see its profits increase. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
If you decide to trade Saab, use the cheapest platform * which is ranked # 1 overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, currencies, bonds and funds in 135 markets, all from one integrated account. Promoted
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 any of the stocks mentioned.
*Interactive Brokers Ranked Least Expensive Broker By StockBrokers.com Online Annual Review 2020
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.