SKS Technologies Group (ASX:SKS) has had a strong run on the stock market, with its share price up a significant 41% over the past three months. Since the market usually pays for a company’s long-term fundamentals, we decided to investigate whether a company’s key performance indicators are influencing the market.Specifically, I decided to study SKS Technology Group This article will explain ROE.
Return on equity or ROE tests how effectively a company is growing its value and managing investors’ money. In other words, ROE shows the profit generated per dollar of a shareholder’s investment.
Check out our latest analysis for SKS Technologies Group.
How do you calculate return on equity?
Return on equity can be calculated using the following formula:
Return on equity = Net income (from continuing operations) ÷ Shareholders’ equity
So, based on the above formula, the ROE for SKS Technologies Group is:
12% = AU$632,000 ÷ AU$5.5 million (based on the trailing twelve months to June 2023).
“Return” is the annual profit. One way he conceptualizes this is that for every A$1 of shareholders’ equity, the company earned him A$0.12 of profit.
What is the relationship between ROE and profit growth rate?
So far, we have learned that ROE is a measure of a company’s profitability. Depending on how much of these profits a company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains constant, the higher the ROE and profit retention, the higher the company’s growth rate compared to companies that don’t necessarily have these characteristics.
SKS Technologies Group’s earnings growth and ROE12%
At first glance, SKS Technologies Group appears to have a decent ROE. Having said that, the company’s ROE is still significantly lower than the industry average of 15%. If so, his massive 60% net profit increase over five years reported by SKS Technologies Group comes as a pleasant surprise. We believe that other factors may be at play here. For example, the company’s management may have made some good strategic decisions, or the company may have a low dividend payout ratio. Keep in mind, the company has a respectable ROE. It’s just that the industry’s ROE is high. Therefore, this also gives some color to the company’s high revenue growth.
We then compare it to the industry’s net income growth rate, which is great to see that SKS Technologies Group’s growth rate is quite high when compared to the industry average growth rate of 22% over the same period.
Earnings growth is a big factor in stock valuation. The next thing investors need to determine is whether the expected earnings growth is already built into the stock price, or the lack thereof. Doing so will help you determine whether a stock’s future is promising or ominous. Is SKS Technologies Group fairly valued compared to other companies? 3 evaluation scales It may help you decide.
Does SKS Technologies Group reinvest its profits efficiently?
SKS Technologies Group’s median three-year payout ratio to shareholders is 14%, which is quite low. This means the company retains 86% of its profits. Therefore, it appears that management is reinvesting profits heavily to grow the business, which is reflected in the earnings growth numbers.
In addition to growing its earnings, SKS Technologies Group also recently started paying a dividend. It’s entirely possible that the company was trying to impress shareholders.
summary
Overall, we’re very satisfied with SKS Technologies Group’s performance. In particular, we like that the company reinvests heavily in its business at a reasonable rate of return. Unsurprisingly, this led to impressive revenue growth. If the company continues to grow its revenue as it has, this could have a positive impact on the stock price, given how earnings per share affect the stock price over the long term. Remember, the stock price outcome also depends on the underlying risks that the company may face. Therefore, it is important for investors to be aware of the risks associated with the business. To learn about the three risks we have identified for SKS Technologies Group, please visit our website. Risk Dashboard is free.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
