Most readers already know that the stock of Husqvarna (STO: HUSQ B) has increased significantly by 14% in the past three months. Given the company’s impressive performance, we decided to take a closer look at its financial metrics because a company’s long-term financial health usually dictates market results. In particular, we will pay particular attention to the ROE of Husqvarna today.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. Simply put, it is used to assess a company’s profitability against its equity.
See our latest review for Husqvarna
How do you calculate return on equity?
the return on equity formula is:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, the ROE for Husqvarna is:
16% = kr3.2b Ã· kr20b (based on the last twelve months up to March 2021).
“Return” refers to a company’s profits over the past year. One way to conceptualize this is that for every SEK1 of shareholders’ capital it has, the company made a profit of SEK 0.16.
What does ROE have to do with profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate compared to companies that do not. the same characteristics.
Husqvarna 16% profit growth and ROE
At first glance, Husqvarna appears to have a decent ROE. Even compared to the industry average of 16%, the company’s ROE looks pretty decent. Husqvarna’s decent returns are not reflected in Husqvarna’s average 4.3% net media income growth over five years. Here are some probable reasons that could keep profit growth low: the company has a high payout rate or the company has misallocated capital, for example.
Then, comparing with the growth in net income of the industry, we found that the growth figure reported by Husqvarna compares quite favorably with the industry average, which shows a decline of 5.0% over the course of the same period.
Profit growth is an important factor in the valuation of stocks. The investor should try to determine whether the expected growth or decline in earnings, whatever the case, is taken into account. In doing so, he will have an idea if the title is heading for clear blue waters or swampy waters ahead. A 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 outlook. So you might want to check if Husqvarna is trading high P / E or low P / E, relative to its industry.
Is Husqvarna Using Profits Efficiently?
The high three-year median payout ratio of 54% (i.e. the company keeps only 46% of its revenue) over the past three years for Husqvarna suggests that the company’s profit growth business was weaker because of the payment of a majority of its income. earnings.
Additionally, Husqvarna has been paying dividends for at least ten years or more, suggesting that management must have perceived that shareholders prefer dividends over earnings growth. Current analyst estimates suggest that the company’s future payout ratio is expected to drop to 43% over the next three years. Despite the expected lower payout ratio, the company’s ROE is not expected to change much.
Overall, we think Husqvarna’s performance has been pretty good. In particular, its high ROE is quite remarkable and also the probable explanation for the considerable growth in its profits. Yet the company retains a small portion of its profits. Which means the company was able to increase their profits despite this, so it’s not too bad. That said, looking at current analysts’ estimates, we have seen that the company’s earnings are expected to accelerate. Are these analyst expectations based on general industry expectations or on company fundamentals? Click here to go to our business analyst’s forecast page.
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