It’s hard to get excited after looking at the recent performance of Securitas (STO: SECU B), as its stock has fallen 12% in the past three months. But if you pay close attention to it, you might find that its key financial metrics look pretty decent, which could mean the stock could potentially rise in the long term given how markets typically reward long-term fundamentals. more resistant term. Specifically, we have decided to study Securitas’ ROE in this article.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.
Check out our latest review for Securitas
How to calculate return on equity?
the formula for ROE is:
Return on equity = Net income (from continuing operations) Equity
So, based on the above formula, Securitas’ ROE is:
13% = kr2.5b kr19b (based on the last twelve months up to March 2021).
The “return” is the annual profit. This therefore means that for each SEK1 of the investments of its shareholder, the company generates a profit of SEK0.13.
Why is ROE important for profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. Based on how much of those profits the company reinvests or “withholds” and how efficiently it does so, we are then able to assess a company’s profit growth potential. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
Securitas profit growth and 13% ROE
At first glance, Securitas appears to have a decent ROE. And comparing with the industry, we found that the industry average ROE is similar at 11%. Despite the moderate return on equity, Securitas has posted 2.1% net income growth over the past five years. Thus, there could be other factors at play that could impact the growth of the business. For example, the company pays out a large portion of its profits as dividends or faces competitive pressures.
In the next step, we compared Securitas’ net income growth with the industry and found that the company has a similar growth figure compared to the industry average growth rate of 2.1% over the course of from the same period.
Profit growth is a huge factor in the valuation of stocks. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. In doing so, he’ll have an idea if the action is heading for clear blue waters or swampy waters ahead. Is SECU B just valued? This intrinsic business value infographic has everything you need to know.
Is Securitas using its retained earnings efficiently?
Securitas has a three-year median payout ratio of 53% (implying that it only keeps 47% of its profits), which means that it pays out most of its profits to shareholders as dividends, and as a result, the company recorded low profits. growth.
In addition, Securitas has paid dividends over a period of at least ten years, which means that the management of the company is committed to paying dividends even if it means little or no growth in earnings. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 47%. However, Securitas’ ROE is expected to increase to 18% although no change is expected in its payout ratio.
Overall, we think Securitas certainly has some positive factors to consider. Its profits increased respectably, as we saw earlier, which was probably due to the reinvestment of its profits at a fairly high rate of return. However, given the high ROE, we believe the company is reinvesting a small portion of its profits. This could possibly prevent the business from developing fully. That said, looking at current analysts’ estimates, we found that the company’s earnings are expected to accelerate. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St does not have any position in the mentioned stocks.
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