Yahoo Finance Are Héroux-Devtek Inc.'s (TSE:HRX) Mixed Financials Driving The Negative Sentiment?
It is hard to get excited after looking at Héroux-Devtek's (TSE:HRX) recent performance, when its stock has declined 14% over the past three months. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. In this article, we decided to focus on Héroux-Devtek's ROE.
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.
View our latest analysis for Héroux-Devtek
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Héroux-Devtek is:
7.9% = CA$29m ÷ CA$372m (Based on the trailing twelve months to December 2021).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.08 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
A Side By Side comparison of Héroux-Devtek's Earnings Growth And 7.9% ROE
At first glance, Héroux-Devtek's ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 9.9%. Having said that, Héroux-Devtek's five year net income decline rate was 22%. Bear in mind, the company does have a slightly low ROE. So that's what might be causing earnings growth to shrink.
Next, on comparing with the industry net income growth, we found that Héroux-Devtek's earnings seems to be shrinking at a similar rate as the industry which shrunk at a rate of a rate of 22% in the same period.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. What is HRX worth today? The intrinsic value infographic in our free research report helps visualize whether HRX is currently mispriced by the market.
Is Héroux-Devtek Efficiently Re-investing Its Profits?
Héroux-Devtek doesn't pay any dividend, meaning that the company is keeping all of its profits, which makes us wonder why it is retaining its earnings if it can't use them to grow its business. It looks like 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 Héroux-Devtek. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
