Are SigmaRoc plc's (LON:SRC) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?
It's hard to rejoice after the recent performance of SigmaRoc (LON: SRC), when the stock was down 7.3% last month. However, if you look carefully, you might find that key financial indicators look pretty decent, which could mean the stock has the potential to go up in the long run, as markets typically reward more resilient long-term fundamentals. In particular, today we will be paying attention to SigmaRoc's ROE.
The return on equity, or ROE, is a key metric used to assess how efficiently a company's management is using the company's capital. In simpler terms, it measures a company's profitability relative to equity.
Check out our latest analysis for SigmaRoc
How do you calculate the return on equity?
The formula for the return on equity is:
Return on Equity = Net Income (from continuing operations) ÷ Equity
So based on the above formula, the ROE for SigmaRoc is:
3.3% = UK £ 3.5m ÷ UK £ 108m (based on the last twelve months through June 2020).
The "return" is the profit for the past twelve months. One way to conceptualize this is for the company to make a profit of £ 0.03 for every £ 1 of equity.
What does ROE have to do with earnings growth?
So far we have learned that the ROE is a measure of a company's profitability. Based on how much of its profits the company intends to reinvest or "keep", we can then evaluate a company's future ability to generate profit. Assuming all else is equal, companies that have both higher return on equity and higher retained earnings typically have a higher growth rate than companies that do not share the same characteristics.
SigmaRoc and ROE earnings growth of 3.3%
At first glance, there isn't much to talk about about SigmaRoc's ROE. Compared to the average industry ROE of 9.2%, we feel even less enthusiastic because of the company's ROE. Even so, SigmaRoc has surprisingly seen an extraordinary 60% growth in net income over the past five years. Hence there could be other reasons for this growth. For example, it is possible that the company's management made some good strategic decisions, or that the company has a low payout ratio.
As a next step, we compared SigmaRoc's net profit growth to the industry and happily found that the company's growth is higher than the average industry growth of 28%.
Past earnings growth
The foundation of a company's value creation is largely tied to profit growth. Next, investors need to determine whether or not expected earnings growth is already built into the stock price. That way, they can determine if the future of the stock is promising or threatening. Is SigmaRoc rated fairly compared to other companies? These 3 benchmarks can help you make a decision.
Is SigmaRoc using its retained earnings effectively?
Overall, it looks like SigmaRoc has some positives in its business. Despite the low return, the fact that the company reinvests a very large portion of its profits in its business undoubtedly contributed to its high earnings growth. However, the company's earnings growth is likely to slow, as forecast in the latest analyst estimates. For more information on the latest analyst forecasts for the company, see this visualization of analyst forecasts for the company.
This article from Simply Wall St is of a general nature. It is not a recommendation to buy or sell shares and does not take into account your goals or your financial situation. We want to provide you with a long-term, focused analysis based on fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or quality materials. Simply Wall St has no position in the stocks mentioned.
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