Should Weakness in Orion Energy Systems, Inc.'s (NASDAQ:OESX) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?
With its stock down 17% over the past three months, it is easy to disregard Orion Energy Systems (NASDAQ:OESX). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Orion Energy Systems' ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for Orion Energy Systems
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 Orion Energy Systems is:
1.2% = US$746k ÷ US$63m (Based on the trailing twelve months to June 2022).
The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.01.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
Orion Energy Systems' Earnings Growth And 1.2% ROE
It is hard to argue that Orion Energy Systems' ROE is much good in and of itself. Even when compared to the industry average of 11%, the ROE figure is pretty disappointing. However, we we're pleasantly surprised to see that Orion Energy Systems grew its net income at a significant rate of 65% in the last five years. Therefore, there could be other reasons behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
As a next step, we compared Orion Energy Systems' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 9.8%.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 Orion Energy Systems is trading on a high P/E or a low P/E, relative to its industry.
Is Orion Energy Systems Using Its Retained Earnings Effectively?
Given that Orion Energy Systems doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.
Summary
On the whole, we do feel that Orion Energy Systems has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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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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