Oxford Metrics plc's (LON:OMG) Has Been On A Rise But Financial Prospects Look Weak: Is The Stock Overpriced?
Oxford Metrics (LON:OMG) has had a great run on the share market with its stock up by a significant 11% over the last three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Particularly, we will be paying attention to Oxford Metrics' ROE today.
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.
Check out our latest analysis for Oxford Metrics
How Do You Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Oxford Metrics is:
7.4% = UK£5.8m ÷ UK£78m (Based on the trailing twelve months to March 2023).
The 'return' refers to a company's earnings over the last year. That means that for every £1 worth of shareholders' equity, the company generated £0.07 in profit.
Why Is ROE Important For 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 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.
Oxford Metrics' Earnings Growth And 7.4% ROE
When you first look at it, Oxford Metrics' ROE doesn't look that attractive. However, its ROE is similar to the industry average of 7.7%, so we won't completely dismiss the company. We can see that Oxford Metrics has grown at a five year net income growth average rate of 2.1%, which is a bit on the lower side. Remember, the company's ROE is not particularly great to begin with. Hence, this does provide some context to low earnings growth seen by the company.
As a next step, we compared Oxford Metrics' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 21% 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Oxford Metrics fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Oxford Metrics Using Its Retained Earnings Effectively?
With a high three-year median payout ratio of 83% (or a retention ratio of 17%), most of Oxford Metrics' profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.
In addition, Oxford Metrics 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
Overall, we would be extremely cautious before making any decision on Oxford Metrics. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. In brief, we think the company is risky and investors should think twice before making any final judgement on this company. Our risks dashboard would have the 2 risks we have identified for Oxford Metrics.
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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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