Should the weakness in Neurosoft Software Production SA (BIT:NRST) stock be taken as a sign that the market will correct the stock price given decent financials?

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Neurosoft Software Production (BIT:NRST) had a rough week with a 13% drop in its share price. 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. Specifically, we decided to study the ROE of Neurosoft Software Production in this article.

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

Check out our latest analysis for Neurosoft Software Production

How is ROE calculated?

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 Neurosoft Software Production is:

22% = €898,000 ÷ €4.1m (based on the last twelve months to December 2021).

“Yield” is the income the business has earned over the past year. One way to conceptualize this is that for every euro of share capital it has, the company has made a profit of 0.22 euro.

Why is ROE important for 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. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

A side-by-side comparison of Neurosoft Software Production earnings growth and ROE of 22%

First, we recognize that Neurosoft Software Production has a significantly high ROE. Second, even when compared to the industry average of 17%, the company’s ROE is quite impressive. As you might expect, the 35% drop in net profit reported by Neurosoft Software Production does not bode well for us. We feel there could be other factors at play here that are preventing the company from growing. For example, the company may have a high payout ratio or the company may have misallocated capital, for example.

So, in a next step, we benchmarked Neurosoft Software Production’s performance against the industry and were disappointed to find that while the company was cutting profits, the industry was increasing profits at a rate of 20 % over the same period.

BIT: NRST Past Earnings Growth May 4, 2022

Earnings growth is an important factor in stock valuation. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. 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 the valuation of Neurosoft Software Production, check out this indicator of its price/earnings ratio, relative to its sector.

Is Neurosoft software production effectively using its retained earnings?

Since Neurosoft Software Production pays no dividends, we infer that it keeps all of its earnings, which is rather confusing considering there’s no earnings growth to show. So there could be other factors at play here that could potentially impede growth. For example, the company had to deal with headwinds.

Conclusion

All in all, it seems that Neurosoft Software Production has positive aspects for its business. However, given the high ROE and strong earnings retention, we would expect the company to post strong earnings growth, but that is not the case here. This suggests that there might be an external threat to the business, which is hampering its growth. While we wouldn’t completely dismiss the business, what we would do is try to figure out how risky the business is to make a more informed decision about the business. Our risk dashboard would have the 3 risks we identified for Neurosoft Software Production.

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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