The Scales (NZSE:SCL) share price has increased by 7.6% over the past three months. However, since long-term fundamentals ultimately determine market outcomes, we decided to focus on its weak financial position in this article. In this article, we decided to focus on Scales' ROE.
Return on equity or ROE is an important factor to be considered by a shareholder as it indicates how effectively their capital is being reinvested. In other words, this reveals that the company has been successful in turning shareholder investments into profits.
Check out our latest analysis for Scale
How do you calculate return on equity?
of ROE calculation formula teeth:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
So, based on the above formula, the ROE for Scales is:
6.4% = NZ$25 million ÷ NZ$385 million (based on the trailing twelve months to December 2023).
“Return” is the profit over the past 12 months. One way he conceptualizes this is that for every NZ$1 of shareholders' equity, the company earned him NZ$0.06 of profit.
Why is ROE important for profit growth?
So far, we have learned that ROE is a measure of a company's profitability. Now we need to assess how much profit the company reinvests or “retains” for future growth, which gives us an idea about the company's growth potential. All else being equal, companies with higher return on equity and profit retention typically have higher growth rates compared to companies that don't have the same characteristics.
Scales' earnings growth and ROE 6.4%
At first glance, Scales' ROE doesn't look very attractive. A quick look into it reveals that the company's ROE is below the industry average of 12%. Therefore, it may not be wrong to say that Scales' 30% decline in net income over his five years is probably a result of his ROE falling. We believe that other factors may also be at play here. For example: low revenue retention or inadequate capital allocation.
As a next step, we compared Scales' performance to its industry, which has seen its revenues shrink at a rate of 3.7% over the same period, indicating that Scales' performance has been weak even compared to an industry that has been slower than the company. I found out that there is. .
Earnings growth is an important metric to consider when evaluating a stock. The next thing investors need to determine is whether the expected earnings growth is already built into the stock price, or the lack thereof. Doing so will help you determine whether a stock's future is promising or ominous. If you're wondering about Scales' valuation, check out this gauge of its price-to-earnings ratio compared to its industry.
Is Scales using its profits effectively?
Scales' very high median payout ratio of 115% over the past three years suggests that the company is paying out more to shareholders than it is earning, which may explain the company's shrinking earnings. It has become. It's usually very difficult to maintain dividends above reported profits. To learn about the two risks we've identified for scale, visit our risks dashboard for free.
Additionally, Scales has been paying dividends for nine years, which is a significant period of time, and management recognized that shareholders wanted a stable dividend despite shrinking profits. It suggests that. After researching the latest analyst consensus data, we find that the company's future dividend payout ratio is expected to decline to 66% over the next three years. Therefore, the expected drop in dividend payout ratio explains that the company's ROE is expected to rise to his 10% over the same period.
conclusion
Overall, we would be very cautious before making any decisions regarding scale. His ROE in particular is very disappointing, not to mention the lack of proper reinvestment in the business. As a result, revenue growth was also very disappointing. Having said that, we researched the latest analyst forecasts and found that while the company has seen its earnings shrink in the past, analysts expect future earnings to grow. To know more about the latest analyst forecasts for the company, check out this visualization of analyst forecasts for the company.
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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
