It is hard to get excited after looking at Electra Gruppen’s (STO:ELEC) recent performance, when its stock has declined 16% over the past three months. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Particularly, we will be paying attention to Electra Gruppen’s ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company’s success at turning shareholder investments into profits.
View our latest analysis for Electra Gruppen
How Is ROE Calculated?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Electra Gruppen is:
8.2% = kr17m ÷ kr205m (Based on the trailing twelve months to March 2020).
The ‘return’ is the yearly profit. That means that for every SEK1 worth of shareholders’ equity, the company generated SEK0.08 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we’ve learnt that ROE is a measure of a company’s profitability. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Electra Gruppen’s Earnings Growth And 8.2% ROE
On the face of it, Electra Gruppen’s ROE is not much to talk about. A quick further study shows that the company’s ROE doesn’t compare favorably to the industry average of 15% either. Given the circumstances, the significant decline in net income by 15% seen by Electra Gruppen over the last five years is not surprising. We reckon that there could also be other factors at play here. Such as – low earnings retention or poor allocation of capital.
Next, when we compared with the industry, which has shrunk its earnings at a rate of 1.5% in the same period, we still found Electra Gruppen’s performance to be quite bleak, because the company has been shrinking its earnings faster than the industry.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is ELEC worth today? The intrinsic value infographic in our free research report helps visualize whether ELEC is currently mispriced by the market.
Is Electra Gruppen Efficiently Re-investing Its Profits?
Electra Gruppen’s declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 84% (or a retention ratio of 16%). With only very little left to reinvest into the business, growth in earnings is far from likely. You can see the 4 risks we have identified for Electra Gruppen by visiting our risks dashboard for free on our platform here.
Moreover, Electra Gruppen has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.
Overall, we would be extremely cautious before making any decision on Electra Gruppen. Because the company is not reinvesting much into the business, and given the low ROE, it’s not surprising to see the lack or absence of growth in its earnings. So far, we’ve only made a quick discussion around the company’s earnings growth. To gain further insights into Electra Gruppen’s past profit growth, check out this visualization of past earnings, revenue and cash flows.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.