With its stock down 44% over the past three months, it is easy to disregard Pro-Dex (NASDAQ:PDEX). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Pro-Dex’s ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Pro-Dex is:
25% = US$9.0m ÷ US$37m (Based on the trailing twelve months to June 2025).
The ‘return’ is the yearly profit. One way to conceptualize this is that for each $1 of shareholders’ capital it has, the company made $0.25 in profit.
View our latest analysis for Pro-Dex
So far, we’ve learned that ROE is a measure of a company’s profitability. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
To begin with, Pro-Dex has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 11% the company’s ROE is quite impressive. However, we are curious as to how the high returns still resulted in a flat growth for Pro-Dex in the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. These include low earnings retention or poor allocation of capital
As a next step, we compared Pro-Dex’s net income growth with the industry and were disappointed to see that the company’s growth is lower than the industry average growth of 15% in the same period.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Pro-Dex fairly valued compared to other companies? These 3 valuation measures might help you decide.
