Should the weakness in Kesla Oyj (HEL:KELAS) shares be taken as a sign that the market will correct the share price given the decent financials?

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With its stock down 11% over the past week, it’s easy to overlook Kesla Oyj (HEL:KELAS). 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, we will pay attention to the ROE of Kesla Oyj today.

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.

See our latest review for Kesla Oyj

How to calculate return on equity?

the return on equity formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Kesla Oyj is:

6.0% = €787,000 ÷ €13m (based on the last twelve months to June 2021).

“Yield” refers to a company’s earnings over the past year. This therefore means that for each €1 of investment by its shareholder, the company generates a profit of €0.06.

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 gauge 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 compared to companies that don’t necessarily exhibit these characteristics.

Kesla Oyj earnings growth and ROE of 6.0%

When you first look at it, Kesla Oyj’s ROE doesn’t look so appealing. Then, compared to the industry average ROE of 11%, the company’s ROE leaves us even less excited. However, we can see that Kesla Oyj has experienced a modest net income growth of 16% over the past five years. Thus, there could be other aspects that positively influence the profit growth of the company. For example, the business has a low payout ratio or is efficiently managed.

Then, comparing with the industry net income growth, we found that the growth figure reported by Kesla Oyj compares quite favorably to the industry average, which shows a decline of 4.4% over the of the same period.

HLSE: KELAS Past Earnings Growth January 25, 2022

Earnings growth is an important metric to consider when evaluating a stock. 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. 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. Thus, you might want to check if Kesla Oyj is trading on a high P/E or a low P/E, relative to its industry.

Does Kesla Oyj use its profits efficiently?

Kesla Oyj has a healthy combination of a moderate three-year median payout ratio of 43% (or a retention rate of 57%) and respectable earnings growth, as we saw above, this which means that the company has made efficient use of its profits.

Also, Kesla Oyj has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we feel Kesla Oyj has positive attributes. Despite its low rate of return, the fact that the company reinvests a very large portion of its profits back into its business no doubt contributed to the strong growth in its profits. That said, the latest forecasts from industry analysts show that the company’s earnings are set to accelerate. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.

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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