Will Weakness in Omega Flex, Inc.'s (NASDAQ:OFLX) Stock Prove Temporary Given Strong Fundamentals?
Omega Flex (NASDAQ:OFLX) has had a rough three months with its share price down 6.6%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Omega Flex's ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Omega Flex
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Omega Flex is:
46% = US$25m ÷ US$53m (Based on the trailing twelve months to June 2021).
The 'return' is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.46 in profit.
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.
Omega Flex's Earnings Growth And 46% ROE
To begin with, Omega Flex has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 12% also doesn't go unnoticed by us. This probably laid the groundwork for Omega Flex's moderate 7.4% net income growth seen over the past five years.
As a next step, we compared Omega Flex's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 8.9% in the same period.
Earnings growth is a huge factor in stock valuation. 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. If you're wondering about Omega Flex's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Omega Flex Using Its Retained Earnings Effectively?
The high three-year median payout ratio of 52% (or a retention ratio of 48%) for Omega Flex suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Additionally, Omega Flex has paid dividends over a period of eight years which means that the company is pretty serious about sharing its profits with shareholders.
Summary
In total, we are pretty happy with Omega Flex's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Omega Flex's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.
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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