It’s hard to get excited after watching the recent performance of Standex International (NYSE:SXI), as its stock is down 20% in the past three months. However, the company’s fundamentals look pretty decent and long-term financial data is generally in line with future market price movements. In this article, we decided to focus on Standex International DEER.
Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In simpler terms, it measures a company’s profitability relative to equity.
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 Standex International is:
12% = $63 million ÷ $528 million (based on trailing 12 months to March 2022).
“Yield” refers to a company’s earnings over the past year. One way to conceptualize this is that for every $1 of share capital it has, the firm has made a profit of $0.12.
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 its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
A side-by-side comparison of Standex International’s earnings growth and 12% ROE
For starters, Standex International’s ROE seems acceptable. Additionally, the company’s ROE is similar to the industry average of 12%. Standex International’s decent returns are not reflected in Standex International’s lackluster five-year net income growth average of 4.1%. A few likely reasons that could keep earnings growth low are – the company has a high payout ratio or the company has misallocated capital, for example.
Then, comparing with industry net income growth, we found that Standex International’s reported growth was lower than industry growth of 8.8% over the same period, which we don’t. don’t like to see.
Earnings growth is an important metric to consider when evaluating a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This then helps them determine whether the action is placed for a bright or bleak 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 check if Standex International is trading on a high P/E or on a low P/Ein relation to its industry.
Does Standex International make effective use of its profits?
Despite a moderate three-year median payout ratio of 25% (implying the company retains the remaining 75% of its revenue), Standex International’s earnings growth has been quite weak. So there could be other factors at play here that could potentially impede growth. For example, the company had to deal with headwinds.
Additionally, Standex International has paid dividends over a period of at least ten years, which means the company’s management is committed to paying dividends even if it means little or no earnings growth.
All in all, it seems that Standex International has some positive aspects to its business. However, given the high ROE and strong earnings retention, we would expect the company to post strong earnings growth, but that is not the case here. This suggests that there might be an external threat to the business, which is hampering its growth. That said, the latest forecasts from industry analysts show that the company’s earnings are set to accelerate. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.
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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.