PLC 4ever
Related Articles
Most readers should already know that Microlise Group (LON:SAAS) stock is up a substantial 14% over the past week. However, we have chosen to pay attention to the company’s fundamentals, which do not appear to be a clear indication of the company’s financial health. In this article, we have chosen to focus on the ROE of Microlise Group.
Return on Equity or ROE is an important factor to consider by a shareholder as it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates in relation to its shareholders’ investments.
Check out our latest analysis for the Microlise Group
How do you calculate return on equity?
the Formula for ROE is:
Return on Equity = Net Income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for Microlise Group is:
2.0% = £1.1m ÷ £57m (based on trailing 12 months to June 2021).
The “return” is the income that the company has made in the last year. One way to think of this is that the company makes a profit of £0.02 for every £1 of shareholder capital it has.
What is the relationship between ROE and earnings growth?
So far we’ve learned that ROE is a measure of a company’s profitability. Based on how much of its profits the company reinvests, or “retains,” we are then able to assess a company’s future ability to generate profits. In general, companies with a high return on equity and earnings retention, all other things being equal, have a higher growth rate than companies that do not share these characteristics.
Microlise Group earnings growth and 2.0% ROE
It’s pretty clear that Microlise Group’s ROE is pretty low. Not only that, even compared to the industry average of 9.5%, the company’s ROE is completely unremarkable. Given the circumstances, the significant 28% drop in net profit recorded by the Microlise Group over the past five years is not surprising. However, other factors can also cause earnings to fall. Such as – low earnings retention or poor capital allocation.
That said, we compared Microlise Group’s performance to the industry and were concerned to discover that while the company has seen its earnings shrink, the industry has grown its earnings by 14% over the same period.
Earnings growth is an important factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you’re wondering about Microlise Group’s valuation, check out this benchmark for price-to-earnings versus its industry.
Does the Microlise Group use its retained earnings effectively?
Microlise Group doesn’t pay a dividend, which means potentially all profits are reinvested in the company, which doesn’t explain why the company’s profits have shrunk when it retains all profits. So there could be other factors at play here that could potentially hamper growth. For example, the business has faced some headwinds.
Conclusion
Overall, we feel that the performance shown by the Microlise group is open to many interpretations. While the company has a high reinvestment rate, the low ROE means that all of these reinvestments are of no benefit to investors and, moreover, have a negative impact on earnings growth. In conclusion, we would proceed with caution on this company and one way to do so would be to look at the company’s risk profile. Our risk dashboard would contain the 2 risks that we have identified for Microlise Group.
Do you have any feedback about this article? Concerned about the content? Get in touch directly with us. Alternatively, send an email to the editorial team (at) simplywallst.com.
This Simply Wall St article is of a general nature. We provide comments based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
