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editorial-team@simplywallst.com (Simply Wall St)
3 min read
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With its stock down 3.3% over the past month, it is easy to disregard Spok Holdings (NASDAQ:SPOK). 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 Spok Holdings’ 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
Return on equity 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 Spok Holdings is:
9.7% = US$15m ÷ US$155m (Based on the trailing twelve months to December 2024).
The ‘return’ is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.10.
View our latest analysis for Spok Holdings
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. 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. 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, Spok Holdings’ ROE doesn’t look very promising. Next, when compared to the average industry ROE of 21%, the company’s ROE leaves us feeling even less enthusiastic. Despite this, surprisingly, Spok Holdings saw an exceptional 49% net income growth over the past five years. Therefore, there could be other reasons behind this growth. Such as – high earnings retention or an efficient management in place.
As a next step, we compared Spok Holdings’ net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 28%.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Spok Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.
