Are Lassonde Industries Inc.'s (TSE:LAS.A) Mixed Financials The Reason For Its Gloomy Performance on The Stock Market?
With its stock down 17% over the past three months, it is easy to disregard Lassonde Industries (TSE:LAS.A). 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. Specifically, we decided to study Lassonde Industries' 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. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for Lassonde Industries
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 Lassonde Industries is:
8.4% = CA$73m ÷ CA$869m (Based on the trailing twelve months to April 2022).
The 'return' is the income the business earned 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.
Why Is ROE Important For 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. 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.
Lassonde Industries' Earnings Growth And 8.4% ROE
When you first look at it, Lassonde Industries' ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 7.7%. Having said that, Lassonde Industries has shown a meagre net income growth of 2.3% over the past five years. Bear in mind, the company's ROE is not very high . Hence, this does provide some context to low earnings growth seen by the company.
As a next step, we compared Lassonde Industries' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 4.5% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Lassonde Industries''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Lassonde Industries Using Its Retained Earnings Effectively?
Lassonde Industries has a low three-year median payout ratio of 24% (meaning, the company keeps the remaining 76% of profits) which means that the company is retaining more of its earnings. This should be reflected in its earnings growth number, but that's not the case. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.
In addition, Lassonde Industries has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.
Summary
In total, we're a bit ambivalent about Lassonde Industries' performance. 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 will have the 1 risk we have identified for Lassonde Industries.
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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.
