With the share price down 3.8% in the past three months, it's easy to ignore SDI (ASX:SDI). To determine whether this trend continues, we decided to focus on the weakness in the fundamentals that shape long-term market trends. Specifically, we decided to examine SDI's ROE in this article.
Return on equity or ROE is a key measure used to evaluate how efficiently a company's management is utilizing the company's capital. Simply put, it is used to evaluate a company's profitability compared to its equity.
Check out our latest analysis for SDI.
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 SDI is:
8.0% = AU$7.1 million ÷ AU$88 million (based on the trailing twelve months to June 2023).
“Return” is the profit over the past 12 months. One way he conceptualizes this is that for every A$1 of shareholders' equity, the company earned him A$0.08 of profit.
Why is ROE important for profit growth?
It has already been established that ROE serves as an indicator of how efficiently a company will generate future profits. We are then able to evaluate a company's future ability to generate profits based on how much of its profits it chooses to reinvest or “retain”. Generally speaking, other things being equal, companies with high return on equity and profit retention will have higher growth rates than companies without these attributes.
SDI's revenue growth and ROE 8.0%
At first glance, SDI's ROE does not look very promising. However, ROE is on par with the industry average of 8.9%, so we can't rule it out completely. On the other hand, SDI reported that its net income growth rate over the past five years was quite low at 2.1%. Note that his ROE for the company is not very high. Therefore, this could also be one of the reasons for the company's low revenue growth.
We then compared SDI's net income growth rate with the industry and found that the company's growth rate is lower than the industry average growth rate of 5.6% over the same five-year period, which is a bit concerning.
The foundations that give a company value have a lot to do with its revenue growth. It's important for investors to know whether the market is pricing in a company's expected earnings growth (or decline). This can help you decide whether to position the stock for a bright or bleak future. Is SDI valued? This infographic on a company's intrinsic value contains everything you need to know.
Is SDI effectively reinvesting its profits?
SDI's median three-year payout ratio is 53% (meaning it retains only 47% of its profits), which means it pays out most of its profits to shareholders as dividends. As a result, the company's profits are low. growth.
Additionally, SDI has been paying dividends for at least 10 years. This means the company's management is determined to pay a dividend, even if earnings growth means little. We checked the latest analyst consensus data and found that the company is expected to continue paying out around 44% of its profit over the next three years. Therefore, SDI's future ROE is projected to be 9.2%, which is also similar to its current ROE.
summary
In total, you should think twice before deciding on any investment action regarding SDI. The company hasn't been reinvesting much in its business, and given its low ROE, it's no surprise that its earnings aren't growing or growing at all. That said, the company's earnings are expected to accelerate, according to the latest industry analyst forecasts. Learn more about the company's future revenue growth forecasts here. free Create a report on analyst forecasts to learn more about 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.
