Declining Stock and Solid Fundamentals: Is The Market Wrong About Objective Corporation Limited (ASX:OCL)?

editorial-team@simplywallst.com (Simply Wall St)

Fri, Nov 17, 2023, 5:33 PM 3 min read

It is hard to get excited after looking at Objective's (ASX:OCL) recent performance, when its stock has declined 18% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Objective's 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Objective

How Do You Calculate Return On Equity?

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 Objective is:

29% = AU$21m ÷ AU$74m (Based on the trailing twelve months to June 2023).

The 'return' is the income the business earned over the last year. That means that for every A$1 worth of shareholders' equity, the company generated A$0.29 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

Objective's Earnings Growth And 29% ROE

To begin with, Objective has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 9.4% the company's ROE is quite impressive. As a result, Objective's exceptional 24% net income growth seen over the past five years, doesn't come as a surprise.

Next, on comparing Objective's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 22% over the last few years.

past-earnings-growth — ASX:OCL Past Earnings Growth November 18th 2023

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is OCL fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Objective Making Efficient Use Of Its Profits?

Objective's significant three-year median payout ratio of 50% (where it is retaining only 50% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.

Moreover, Objective is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 47%. Accordingly, forecasts suggest that Objective's future ROE will be 31% which is again, similar to the current ROE.

Summary

On the whole, we feel that Objective's performance has been quite good. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.