AS Harju Elekter (TAL: HAE1T) stock has risen 46% in the past three months. We wanted to take a closer look at its key financial indicators though, as markets typically pay for long-term fundamentals, and in this case, they don’t look very promising. In particular, we will pay special attention to the ROE of AS Harju Elekter today.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In other words, it is a profitability ratio that measures the rate of return on capital contributed by shareholders to the company.
See our latest review for AS Harju Elekter
How is the ROE calculated?
the return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for AS Harju Elekter is:
7.5% = € 5.5m ÷ € 73m (Based on the last twelve months until December 2020).
The “return” is the income the business has earned over the past year. One way to conceptualize this is that for every € 1 of share capital it has, the company has made a profit of € 0.08.
What is the relationship between ROE and profit growth?
We have already established that ROE serves as an effective gauge to generate profit for the future profits of a business. We now need to assess how much profit the business is reinvesting or “withholding” for future growth, which then gives us a sense of the growth potential of the business. 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.
A side-by-side comparison of AS Harju Elekter’s 7.5% profit growth and ROE
At first glance, the ROE of AS Harju Elekter isn’t much to say. We then compared the company’s ROE to the industry as a whole and were disappointed to see that the ROE is 9.4% below the industry average. Therefore, it may not be wrong to say that the 22% five-year drop in net income observed by AS Harju Elekter was likely the result of lower ROE. We believe there could be other factors at play here as well. For example, it is possible that the company has misallocated capital or that the company has a very high payout ratio.
So, we compared AS Harju Elekter’s performance to that of the industry and were disappointed to find that although the company is cutting profits, the industry has increased profits at a rate of 6.5% over the course of from the same period.
Profit growth is an important metric to consider when valuing a stock. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This will help them determine if the future of the stock looks bright or worrisome. Is AS Harju Elekter valued enough compared to other companies? These 3 evaluation measures could help you make a decision.
Is AS Harju Elekter Efficiently Using Its Retained Profits?
AS Harju Elekter’s very high three-year median payout ratio of 108% over the past three years suggests that the company pays its shareholders more than it earns, which explains the decline in profits for the company. business. It is generally very difficult to maintain dividend payments in excess of declared earnings. Our risk dashboard must include the 2 risks that we have identified for AS Harju Elekter.
In addition, AS Harju Elekter 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 profits.
Overall, we would be extremely careful before making a decision on AS Harju Elekter. Specifically, it has performed quite unsatisfactorily when it comes to earnings growth, and a poor ROE and an equally low reinvestment rate seem to be behind this underperformance. So far, we’ve only had a brief discussion of how the company’s earnings grow. You can do your own research on AS Harju Elekter and see how it has performed in the past by watching this FREE detailed graphic past earnings, income and cash flow.
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