Smith-Midland Corporation (NASDAQ:SMID) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?
Smith-Midland's (NASDAQ:SMID) stock is up by a considerable 60% over the past three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. In this article, we decided to focus on Smith-Midland's ROE.
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.
Check out our latest analysis for Smith-Midland
How Is ROE Calculated?
ROE 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 Smith-Midland is:
1.7% = US$569k ÷ US$34m (Based on the trailing twelve months to September 2023).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.02.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Smith-Midland's Earnings Growth And 1.7% ROE
It is hard to argue that Smith-Midland's ROE is much good in and of itself. Not just that, even compared to the industry average of 14%, the company's ROE is entirely unremarkable. Therefore, Smith-Midland's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.
As a next step, we compared Smith-Midland's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 20% in the same period.
Earnings growth is an important metric to consider when valuing a stock. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Smith-Midland is trading on a high P/E or a low P/E, relative to its industry.
Is Smith-Midland Making Efficient Use Of Its Profits?
Smith-Midland doesn't pay any dividend, which means that it is retaining all of its earnings. This makes us question why the company is retaining so much of its profits and still generating almost no growth? So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.
Summary
On the whole, we feel that the performance shown by Smith-Midland can be open to many interpretations. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Up till now, we've only made a short study of the company's growth data. To gain further insights into Smith-Midland's past profit growth, check out this visualization of past earnings, revenue and cash flows.
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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.
