Yahoo Finance Filtronic plc (LON:FTC) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?
Filtronic's (LON:FTC) stock is up by a considerable 31% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. In this article, we decided to focus on Filtronic's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Filtronic
How Do You 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 Filtronic is:
0.6% = UK£60k ÷ UK£9.4m (Based on the trailing twelve months to May 2021).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.01 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Filtronic's Earnings Growth And 0.6% ROE
As you can see, Filtronic's ROE looks pretty weak. Not just that, even compared to the industry average of 4.4%, the company's ROE is entirely unremarkable. Thus, the low net income growth of 4.9% seen by Filtronic over the past five years could probably be the result of it having a lower ROE.
Next, on comparing with the industry net income growth, we found that Filtronic's reported growth was lower than the industry growth of 28% in the same period, which is not something we like to see.
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. This then helps them determine if the stock is placed for a bright or bleak future. Is Filtronic fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Filtronic Using Its Retained Earnings Effectively?
Filtronic doesn't pay any dividend, meaning that potentially all of its profits are being reinvested in the business. However, this doesn't explain the low earnings growth the company has seen. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
Summary
Overall, we have mixed feelings about Filtronic. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. Our risks dashboard would have the 2 risks we have identified for Filtronic.
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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