editorial-team@simplywallst.com (Simply Wall St)
4 min read
In This Article:
Somero Enterprises (LON:SOM) has had a rough three months with its share price down 24%. However, the company’s fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Somero Enterprises’ ROE.
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.
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ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Somero Enterprises is:
22% = US$19m ÷ US$84m (Based on the trailing twelve months to December 2024).
The ‘return’ is the profit over the last twelve months. One way to conceptualize this is that for each £1 of shareholders’ capital it has, the company made £0.22 in profit.
See our latest analysis for Somero Enterprises
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. 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.
At first glance, Somero Enterprises seems to have a decent ROE. On comparing with the average industry ROE of 15% the company’s ROE looks pretty remarkable. Given the circumstances, we can’t help but wonder why Somero Enterprises saw little to no growth in the past five years. We reckon that there could be some other factors at play here that’s limiting the company’s growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
We then compared Somero Enterprises’ net income growth with the industry and found that the company’s growth figure is lower than the average industry growth rate of 9.3% in the same 5-year period, which is a bit concerning.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Somero Enterprises fairly valued compared to other companies? These 3 valuation measures might help you decide.
