Timeless Software (HKG:8028) has had a strong run in the stock market, with its stock rising 18% in the past three months. As most know, fundamentals are what generally guide market price movements over the long term, so we decided to take a look at key financial indicators in business today to see if they have a role to play. play in the recent price movement. In particular, we’ll be paying attention to Timeless Software’s ROE today.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.
Check out our latest analysis for Timeless Software
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 Timeless Software is:
42% = HK$64 million ÷ HK$152 million (based on trailing 12 months to December 2021).
“Yield” refers to a company’s earnings over the past year. This means that for every HK$1 of equity, the company generated HK$0.42 of profit.
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 its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. 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.
Growth in Timeless Software earnings and ROE of 42%
First of all, we love that Timeless Software has an impressive ROE. Additionally, the company’s ROE is above the industry average of 12%, which is quite remarkable. For this reason, Timeless Software’s 4.0% decline in net income over five years raises the question of why high ROE has not translated into earnings growth. Based on this, we believe that there might be other reasons which have not been discussed so far in this article which might hinder the growth of the business. These include poor revenue retention or poor capital allocation.
However, when we compared Timeless Software’s growth with the industry, we found that although the company’s earnings were down, the industry saw earnings growth of 23% over the same period. . It’s quite worrying.
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. This will help them determine if the future of the title looks bright or ominous. If you’re wondering about Timeless Software’s valuation, check out this indicator of its price-earnings ratio, relative to its sector.
Does Timeless Software use its profits efficiently?
Timeless Software does not pay any 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.
Overall, we think Timeless Software certainly has some positives to consider. 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 2 risks we identified for Timeless Software.
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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.