It’s hard to get excited after looking at the recent performance of Hexagon (STO: HEXA B), as its stock has fallen 8.9% 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 decided to study Hexagon’s ROE in this article.
Return on equity or ROE is an important factor for a shareholder to consider, as it tells them how effectively their capital is being reinvested. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
See our latest review for Hexagon
How is the ROE calculated?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, the ROE for Hexagon is:
13% = 872 million euros Ã· 6.7 billion euros (based on the last twelve months up to September 2021).
The “return” is the profit of the last twelve months. This means that for every SEK 1 value of equity, the company generated SEK 0.13 in profit.
What is the relationship between ROE and profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. 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. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
Hexagon profit growth and 13% ROE
At first glance, Hexagon appears to have a decent ROE. And comparing with the industry, we found that the industry average ROE is similar to 13%. Despite the modest returns, Hexagon’s five-year net income growth was quite weak, averaging only 4.9%. Some likely reasons that might keep profit growth low are: the company has a high payout rate or the company has misallocated capital, for example.
As a next step, we compared Hexagon’s net income growth to that of the industry and were disappointed to find that the growth of the company is lower than the industry average growth of 18% over the same period.
Profit growth is an important metric to consider when valuing a stock. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This then helps them determine whether the stock is set for a bright or dark future. Is HEXA B correctly valued? This intrinsic business value infographic has everything you need to know.
Is Hexagon Using Profits Effectively?
Although Hexagon has a decent three-year median payout ratio of 30% (or a retention rate of 70%), it has experienced very little profit growth. Therefore, there could be other reasons for the lack in this regard. For example, the business could be in decline.
In addition, Hexagon 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 the company’s future payout ratio over the next three years is expected to be around 28%. As a result, forecasts suggest that Hexagon’s future ROE will be 15%, which is again similar to the current ROE.
Overall, we think Hexagon has some positive attributes. However, we are disappointed to see a lack of earnings growth despite a high ROE and a high reinvestment rate. We believe that certain external factors could have a negative impact on the company. However, the latest analysts’ forecasts show that the company will continue to see its profits rise. 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.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 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 has no position in any of the stocks mentioned.