editorial-team@simplywallst.com (Simply Wall St)
3 min read
In This Article:
It is hard to get excited after looking at PaySauce’s (NZSE:PYS) recent performance, when its stock has declined 19% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to PaySauce’s ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for PaySauce is:
47% = NZ$1.6m ÷ NZ$3.3m (Based on the trailing twelve months to September 2024).
The ‘return’ refers to a company’s earnings over the last year. So, this means that for every NZ$1 of its shareholder’s investments, the company generates a profit of NZ$0.47.
Check out our latest analysis for PaySauce
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.
Firstly, we acknowledge that PaySauce has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 18% also doesn’t go unnoticed by us. As a result, PaySauce’s exceptional 55% net income growth seen over the past five years, doesn’t come as a surprise.
We then compared PaySauce’s net income growth with the industry and we’re pleased to see that the company’s growth figure is higher when compared with the industry which has a growth rate of 6.1% in the same 5-year period.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you’re wondering about PaySauce’s’s valuation, check out this gauge of its price-to-earnings ratio , as compared to its industry.
