Park City Group (NASDAQ:PCYG) has had a great run on the share market with its stock up by a significant 34% over the last month. Given that stock prices are usually aligned with a company’s financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Park City Group’s ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Park City Group
How Is ROE Calculated?
Return on equity can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Park City Group is:
4.9% = US$2.1m ÷ US$43m (Based on the trailing twelve months to December 2019).
The ‘return’ is the income the business earned over the last year. That means that for every $1 worth of shareholders’ equity, the company generated $0.05 in profit.
Why Is ROE Important For Earnings Growth?
So far, we’ve learnt that ROE is a measure of a company’s profitability. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. 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.
Park City Group’s Earnings Growth And 4.9% ROE
At first glance, Park City Group’s ROE doesn’t look very promising. A quick further study shows that the company’s ROE doesn’t compare favorably to the industry average of 11% either. However, we we’re pleasantly surprised to see that Park City Group grew its net income at a significant rate of 59% in the last five years. So, there might be other aspects that are positively influencing the company’s earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.
As a next step, we compared Park City Group’s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 29%.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock’s future looks promising or ominous. If you’re wondering about Park City Group’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Park City Group Making Efficient Use Of Its Profits?
Given that Park City Group doesn’t pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.
Overall, we feel that Park City Group certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. That being so, according to the latest industry analyst forecasts, the company’s earnings are expected to shrink in the future. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
If you spot an error that warrants correction, please contact the editor at [email protected] 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. Simply Wall St has no position in the stocks mentioned.
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