Most readers will already know that shares of SD Standard ETC (OB:SDSD) have risen a significant 17% over the past month. Since stock prices are usually aligned with a company’s financial performance over the long term, we decided to take a closer look at its financial indicators to see if they had a role to play in the recent price movement. . Specifically, we decided to study the ROE of SD Standard ETC in this article.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
Check out our latest analysis for SD Standard ETC
How to calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for SD Standard ETC is:
14% = $14 million ÷ $99 million (based on trailing 12 months to December 2021).
The “return” is the annual profit. Another way to think about this is that for every NOK 1 worth of equity, the company was able to make a profit of NOK 0.14.
Why is ROE important for earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
SD Standard ETC Earnings Growth and 14% ROE
At first glance, SD Standard ETC seems to have a decent ROE. Additionally, the company’s ROE is similar to the industry average of 12%. As you might expect, the 24% drop in net income reported by SD Standard ETC is a bit of a surprise. So there could be other aspects that could explain this. These include poor revenue retention or poor capital allocation.
However, when we compared SD Standard ETC’s growth with the industry, we found that although the company’s earnings declined, the industry saw 28% earnings growth over the same period. period. It’s quite worrying.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This then helps them determine if the stock is positioned for a bright or bleak future. If you’re wondering about SD Standard ETC’s rating, check out this measure of its price/earnings ratio, relative to its industry.
Does SD Standard ETC effectively reinvest its profits?
SD Standard ETC does not pay any dividends, which means the company keeps all of its profits, which makes us wonder why it keeps its profits if it cannot use them to grow its business. So there could be other factors at play here that could potentially impede growth. For example, the company had to deal with headwinds.
Overall, we feel that SD Standard ETC has positive attributes. However, we are disappointed to see a lack of earnings growth, even despite a high ROE and high reinvestment rate. We believe that there could be external factors that could negatively impact the business. While we wouldn’t completely dismiss the business, what we would do is try to figure out how risky the business is to make a more informed decision about the business. To learn about the 2 risks we have identified for SD Standard ETC, visit our risk dashboard for free.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.