Xilam Animation (EPA: XIL) had a strong run in the equity market with its stock rising significantly 12% over the past month. As most know, fundamentals generally guide long-term market price movements, so we decided to look at the company’s key financial metrics today to see if they have a role to play in the recent one. price movement. Specifically, we have decided to study the ROE of Xilam Animation in this article.
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 short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.
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How is the ROE calculated?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, Xilam Animation’s ROE is:
4.6% = 2.8 million euros ÷ 61 million euros (based on the last twelve months up to December 2020).
The “return” is the annual profit. Another way to look at this is that for every $ 1 in equity, the company was able to make $ 0.05 in profit.
What does ROE have to do with profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. Based on how much of those profits the company reinvests or “withholds” and how efficiently it does so, we are then able to assess a company’s profit growth potential. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.
Xilam Animation profit growth and 4.6% ROE
When you first watch it, Xilam Animation’s ROE doesn’t look so appealing. However, given that the company’s ROE is similar to the industry average ROE of 5.1%, we can think about it. That said, Xilam Animation has shown modest net income growth of 15% over the past five years. Given the slightly low ROE, it is likely that other aspects are behind this growth. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.
Next, comparing with the industry’s net income growth, we found that the growth figure reported by Xilam Animation compares quite favorably with the industry average, which shows a 7.9% decline over the course of from the same period.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This then helps them determine whether the stock is set for a bright or dark future. If you are wondering about the valuation of Xilam Animation, check out this gauge of its price / earnings ratio, compared to its sector.
Is Xilam Animation Efficiently Using Its Retained Earnings?
Since Xilam Animation does not pay any dividends to its shareholders, we infer that the company has reinvested all of its profits to develop its business.
All in all, it seems that Xilam Animation has positive aspects for its business. Despite its low rate of return, the fact that the company reinvested a very large portion of its profits back into its business undoubtedly contributed to the strong profit growth. 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.
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 material. Simply Wall St has no position in any of the stocks mentioned.
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