Unimot (WSE: UNT) has seen good progress in the equity market with a stock rising 35% in the past three months. Given the company’s impressive performance, we decided to take a closer look at its financial metrics because a company’s long-term financial health usually dictates market results. In this article, we have decided to focus on Unimot’s ROE.
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 reveals the company’s success in turning shareholders’ investments into profits.
Discover our latest analyzes for Unimot
How to calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, Unimot’s ROE is:
13% = 35 m zł ÷ 266 m zł (based on the last twelve months up to December 2020).
The “return” is the income the business has earned over the past year. This therefore means that for each PLN1 of the investments of its shareholder, the company generates a profit of 0.13 PLN.
What does ROE have to do with profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. Based on how much of that profit the company reinvests or “withholds”, and how effectively it does so, we are then able to assess a company’s profit growth potential. 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.
Unimot profit growth and return on investment of 13%
For starters, Unimot’s ROE seems acceptable. And comparing with the industry, we found that the industry average ROE is similar at 15%. This probably partly explains Unimot’s moderate 14% growth over the past five years, among other factors.
Second, we compared Unimot’s net income growth to that of the industry and found that the company had a similar growth figure compared to the industry’s average growth rate of 16% over the course of from the same period.
Profit growth is an important factor in the valuation of stocks. The investor should try to determine whether the expected growth or decline in earnings, whatever the case, is taken into account. This then helps them determine whether the action is set for a bright or gloomy future. A good indicator of expected earnings growth is the P / E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check if Unimot is trading high P / E or low P / E, relative to its industry.
Is Unimot effectively using its profits?
Unimot has a healthy combination of a moderate three-year median payout ratio of 42% (or retention rate of 58%) and respectable earnings growth as we saw above, which means that the company has used its profits efficiently.
Additionally, Unimot has paid dividends over a seven-year period, which means the company is serious enough to share its profits with its shareholders. Our latest analyst data shows the company’s future payout ratio is expected to drop to 25% over the next three years.
All in all, we are quite satisfied with the performance of Unimot. Specifically, we like the fact that the company reinvests a large portion of its profits at a high rate of return. This of course led the company to record substantial growth in profits. We also looked at the latest analysts’ forecast and found that the company’s earnings growth is expected to be similar to its current growth rate. Are these analyst expectations based on general industry expectations or on company fundamentals? Click here to go to our business analyst’s forecast page.
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