Declining Stock and Solid Fundamentals: Is The Market Wrong About SKS Technologies Group Limited (ASX:SKS)?
It is hard to get excited after looking at SKS Technologies Group's (ASX:SKS) recent performance, when its stock has declined 16% over the past month. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to SKS Technologies Group'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
Check out our latest analysis for SKS Technologies Group
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 SKS Technologies Group is:
60% = AU$3.0m ÷ AU$5.1m (Based on the trailing twelve months to June 2022).
The 'return' is the yearly profit. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.60 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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.
SKS Technologies Group's Earnings Growth And 60% ROE
Firstly, we acknowledge that SKS Technologies Group has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 13% which is quite remarkable. As a result, SKS Technologies Group's exceptional 74% net income growth seen over the past five years, doesn't come as a surprise.
Next, on comparing with the industry net income growth, we found that SKS Technologies Group's growth is quite high when compared to the industry average growth of 20% in the same period, which is great to see.
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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about SKS Technologies Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is SKS Technologies Group Using Its Retained Earnings Effectively?
SKS Technologies Group's ' three-year median payout ratio is on the lower side at 8.9% implying that it is retaining a higher percentage (91%) of its profits. So it looks like SKS Technologies Group is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Summary
In total, we are pretty happy with SKS Technologies Group's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. 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. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. You can see the 3 risks we have identified for SKS Technologies Group by visiting our risks dashboard for free on our platform here.
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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.
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