Does Somero Enterprises, Inc.’s (LON:SOM) latest stock performance reflect its financial health?
Somero Enterprises (LON:SOM) has had a strong run in the stock market with a significant 21% increase in its shares over the past month. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market outcomes. Specifically, we decided to study the ROE of Somero Enterprises in this article.
Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
See our latest analysis for Somero Enterprises
How do you calculate return on equity?
The ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Somero Enterprises is:
46% = $35 million ÷ $76 million (based on trailing 12 months to December 2021).
The “yield” is the profit of the last twelve months. This therefore means that for every pound invested by its shareholder, the company generates a profit of 0.46 pounds.
What is the relationship between ROE and earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to assess a company’s earnings 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.
A side-by-side comparison of Somero Enterprises earnings growth and 46% ROE
First, we recognize that Somero Enterprises has a significantly high ROE. Additionally, the company’s ROE is above the industry average of 12%, which is quite remarkable. This likely laid the foundation for Somero Enterprises’ moderate 13% net income growth seen over the past five years.
Then, comparing with the industry net income growth, we found that Somero Enterprises’ growth is quite high compared to the average industry growth of 6.4% over the same period, which which is great to see.
Earnings growth is an important factor in stock valuation. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or ominous. If you’re wondering about the valuation of Somero Enterprises, check out this indicator of its price-earnings ratio, relative to its sector.
Does Somero Enterprises use its profits efficiently?
Somero Enterprises has a large three-year median payout ratio of 50%, which means it only has 50% left to reinvest in its business. This implies that the company was able to achieve decent earnings growth despite returning most of its earnings to shareholders.
Additionally, Somero Enterprises is committed to continuing to share its profits with shareholders, which we infer from its nine-year long history of paying dividends.
Overall, we believe Somero Enterprises’ performance has been quite good. We are particularly impressed with the company’s tremendous earnings growth, which was likely supported by its high ROE. Although the company pays most of its profits in the form of dividends, it was able to increase its profits despite this, so this is probably a good sign. So far, we have only made a short study of the company’s growth data. So it might be worth checking that out. free detailed graph past revenue from Somero Enterprises, as well as revenue and cash flow to get a deeper insight into company performance.
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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.
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