Most readers would already be aware that Payton Planar Magnetics’ (EBR:PAY) stock increased significantly by 18% over the past three months. Given the company’s impressive performance, we decided to study its financial indicators more closely as a company’s financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Payton Planar Magnetics’ ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
How To Calculate Return On Equity?
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 Payton Planar Magnetics is:
18% = US$10m ÷ US$56m (Based on the trailing twelve months to March 2021).
The ‘return’ is the profit over the last twelve months. So, this means that for every €1 of its shareholder’s investments, the company generates a profit of €0.18.
What Has ROE Got To Do With Earnings Growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.
Payton Planar Magnetics’ Earnings Growth And 18% ROE
To begin with, Payton Planar Magnetics seems to have a respectable ROE. Further, the company’s ROE compares quite favorably to the industry average of 13%. This certainly adds some context to Payton Planar Magnetics’ exceptional 21% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.
We then compared Payton Planar Magnetics’ net income growth with the industry and we’re pleased to see that the company’s growth figure is higher when compared with the industry which has a growth rate of 9.5% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Payton Planar Magnetics is trading on a high P/E or a low P/E, relative to its industry.
Is Payton Planar Magnetics Making Efficient Use Of Its Profits?
The three-year median payout ratio for Payton Planar Magnetics is 40%, which is moderately low. The company is retaining the remaining 60%. By the looks of it, the dividend is well covered and Payton Planar Magnetics is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
Besides, Payton Planar Magnetics has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders.
On the whole, we feel that Payton Planar Magnetics’ performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. To know the 1 risk we have identified for Payton Planar Magnetics visit our risks dashboard for free.
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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.
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