Should weakness in Topicus.com Inc. (CVE:TOI) stock be taken as a sign that the market will correct the stock price given decent financials?

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With its stock down 15% in the past three months, it’s easy to overlook Topicus.com (CVE:TOI). 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 this article, we decided to focus on the ROE of Topicus.com.

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.

Check out our latest analysis for Topicus.com

How is 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 Topicus.com is:

62% = €234m ÷ €377m (based on the last twelve months to March 2022).

“Yield” refers to a company’s earnings over the past year. This means that for every Canadian dollar of equity, the company generated a profit of 0.62 Canadian dollars.

What is the relationship between ROE and earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of ​​the company’s 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 Topicus.com earnings growth and 62% ROE

First, we recognize that Topicus.com has a significantly high ROE. Second, a comparison with the average industry-reported ROE of 10% also does not go unnoticed for us. As you might expect, the 77% drop in net income reported by Topicus.com does not bode well for us. So there could be other aspects that could explain this. These include poor revenue retention or poor capital allocation.

So, in a next step, we benchmarked Topicus.com’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 9 .5% over the same period.

past earnings-growth

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. 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 whether Topicus.com is trading on a high P/E or on a low P/E, relative to its sector.

Does Topicus.com effectively reinvest its profits?

Topicus.com pays no dividends, which means that potentially all of its profits are reinvested in the company, which does not explain why the company’s profits have decreased if it retains all of its profits. It seems that there could be other reasons for the lack in this regard. For example, the business might be in decline.

Summary

All in all, it seems that Topicus.com 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 will have the 1 risk we have identified for Topicus.com.

Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

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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