Most readers already know that shares of Snipp Interactive (CVE:SPN) have risen a significant 21% over the past month. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market outcomes. In this article, we decided to focus on Snipp Interactive’s ROE.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
Check out our latest analysis for Snipp Interactive
How to 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 Snipp Interactive is:
33% = $2.3 million ÷ $7.1 million (based on trailing 12 months to March 2022).
The “yield” is the amount earned after tax over the last twelve months. This therefore means that for every C$1 of investment by its shareholder, the company generates a profit of C$0.33.
What is the relationship between ROE and earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings 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.
Snipp Interactive earnings growth and 33% ROE
First, we recognize that Snipp Interactive has a significantly high ROE. Additionally, the company’s ROE is above the industry average of 14%, which is quite remarkable. As a result, Snipp Interactive’s outstanding 32% net income growth over the past five years comes as no surprise.
As a next step, we compared Snipp Interactive’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 32% over the course of the same period.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. If you’re wondering about Snipp Interactive’s valuation, check out this indicator of its price-earnings ratio, relative to its sector.
Does Snipp Interactive use its profits efficiently?
Snipp Interactive 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.
Overall, we think Snipp Interactive performed quite well. Specifically, we like that the company reinvests a large portion of its earnings at a high rate of return. This of course caused the company to see substantial growth in profits. If the company continues to increase its earnings as it has, it could have a positive impact on its share price given how earnings per share influence prices over the long term. Let’s not forget that business risk is also one of the factors that affect the stock price. This is therefore also an important area for investors to pay attention to before making a decision on a company. To learn about the 4 risks we have identified for Snipp Interactive, visit our risk dashboard for free.
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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.
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