It’s easy to ignore Scott Technology (NZSE:SCT), with the share price down 26% in the last three months, but share prices are usually driven by a company’s long term financial performance, which in this case looks very promising.In particular, we’ll be looking at Scott Technology’s ROE today.
Return on equity (ROE) is a key indicator used to assess how efficiently a company’s management is utilizing their capital. Simply put, it measures a company’s profitability relative to shareholder’s capital.
View our latest analysis for Scott Technology
How to Calculate Return on Equity?
of Return on Equity Formula teeth:
Return on Equity = Net Income (from continuing operations) / Shareholders’ Equity
So, based on the above formula, Scott Technology’s ROE is:
11% = NZ$12m ÷ NZ$113m (Based on the trailing 12 months to February 2024).
“Returns” refers to the profits a company has made over the past year. Another way to think of this is that for every NZ$1 worth of stock, the company was able to make NZ$0.11 in profit.
What is the relationship between ROE and profit growth?
We’ve already mentioned that ROE serves as an efficient profit-generating indicator to predict a company’s future earnings. Next, we need to evaluate how much of its profits the company reinvests or “retains” for future growth. This gives us an idea about the growth potential of the company. Assuming all else remains constant, the higher the ROE and retained earnings, the better the growth rate of a company compared to companies that don’t necessarily have these characteristics.
Scott Technology’s revenue growth and 11% ROE
Firstly, Scott Technology’s ROE appears to be high. Compared to the industry average of 13%, the company’s ROE is quite good. This may explain to some extent Scott Technology’s impressive 33% increase in net income over the past five years and other factors. There may also be other aspects that positively impact the company’s earnings growth, such as the company’s low dividend payout ratio or efficient management.
As a next step, we compared Scott Technology’s net income growth with the industry and found that the company’s growth rate is similar compared to the average industry growth rate of 30% during the same period.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is whether the expected earnings growth, or lack thereof, is already priced into the share price. Doing so will help them determine if the stock’s future is promising or ominous. Is SCT fairly valued? This infographic on the company’s intrinsic value tells you all you need to know.
Is Scott Technology using its profits efficiently?
Scott Technology’s three-year median dividend payout ratio is very high at 55% (it only retains 45% of its profits), which shows that the company has been able to achieve high earnings growth despite returning the majority of its profits to shareholders.
Additionally, Scott Technology is determined to continue distributing its profits to shareholders, as inferred from its long history of paying dividends for at least 10 years. After studying the latest analyst consensus data, the company is expected to continue distributing around 63% of its profits over the next three years. Therefore, Scott Technology’s future ROE is predicted to be 11%, which is also roughly the same as its current ROE.
Conclusion
Overall, we’re very pleased with Scott Technology’s performance, especially its high ROE, which has contributed to its impressive revenue growth. The company only reinvests a small portion of its profits, but it’s still been able to grow its earnings, which is commendable. That said, the latest industry analyst forecasts suggest the company’s earnings growth will slow. You can find out more about the company’s future earnings growth forecasts here. free For more information, see the company’s analyst forecast report.
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This article by Simply Wall St is general in nature. We use only unbiased methodologies to provide commentary based on historical data and analyst forecasts, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks, and does not take into account your objectives, or your financial situation. We seek to provide long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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