The action of E. Schnapp Works (TLV: SHNP) grew 11% over the past week. As most know, fundamentals generally guide long-term market price movements, so we decided to look at the company’s key financial metrics today to see if they have a role to play in the recent one. price movement. More precisely, we decided to study the ROE of E. Schnapp Works in this article.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how efficiently their capital is being reinvested. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
See our latest review for E. Schnapp Works
How do you 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 E. Schnapp Works is:
11% = ₪ 35m ₪ 310m (Based on the last twelve months up to March 2021).
The “return” is the amount earned after tax over the past twelve months. One way to conceptualize this is that for every 1 of share capital it has, the company has made 0.11 of profit.
Why is ROE important for profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. We now need to assess the profits that the business is reinvesting or “withholding” for future growth, which then gives us an idea of the growth potential of the business. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.
A side-by-side comparison of E. Schnapp Works and 11% ROE
To begin with, the ROE of E. Schnapp Works seems acceptable. Especially compared to the industry average of 8.2%, the company’s ROE looks pretty impressive. Needless to say, we are quite surprised to see that E. Schnapp Works has declined 29% over the past five years. Based on this, we believe that there might be other reasons that have not been discussed so far in this article that may be hampering the growth of the business. For example, the company may have a high payout ratio or the company may have misallocated capital, for example.
Then when we compared with the industry, which cut their profits at a rate of 8.8% over the same period, we still found that E. Schnapp Works were pretty gloomy because the company cut its profits faster than the industry.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This then helps them determine whether the stock is set for a bright or dark future. Is it that. Schnapp Works is just valued over other companies? These 3 evaluation measures could help you decide.
Is E. Schnapp Works Efficiently Reinvesting Profits?
When we put together the low three-year median payout ratio of E. Schnapp Works by 13% (where it keeps 87% of its profits), calculated for the last three-year period, we are puzzled by the lack of growth. This should generally not be the case when a business keeps most of its profits. It seems that there could be other reasons for the lack in this regard. For example, the business could be in decline.
Additionally, E. Schnapp Works has been paying dividends for at least ten years or more, suggesting that management must have perceived that shareholders prefer dividends over earnings growth.
Overall, we think E. Schnapp Works has some positive attributes. Still, the weak earnings growth is a bit of a concern, especially since the company has a high rate of return and is reinvesting a huge chunk of its earnings. At first glance, there could be other factors, which do not necessarily control the business, which are preventing growth. While we don’t completely reject the business, what we would do is try to determine how risky the business is in order to make a more informed decision about the business. To learn about the 3 risks we have identified for E. Schnapp Works visit our free risk dashboard.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St does not have any position in the mentioned stocks.
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