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Most readers would already be aware that Lindsay Australia's (ASX:LAU) stock increased significantly by 13% over the past three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Specifically, we decided to study Lindsay Australia's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for Lindsay Australia
How Is ROE Calculated?
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 Lindsay Australia is:
1.4% = AU$1.3m ÷ AU$89m (Based on the trailing twelve months to June 2021).
The 'return' is the yearly profit. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.01 in profit.
Why Is ROE Important For Earnings Growth?
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. 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.
Lindsay Australia's Earnings Growth And 1.4% ROE
It is hard to argue that Lindsay Australia's ROE is much good in and of itself. Even when compared to the industry average of 8.7%, the ROE figure is pretty disappointing. For this reason, Lindsay Australia's five year net income decline of 8.8% is not surprising given its lower ROE. We reckon that there could also be other factors at play here. Such as - low earnings retention or poor allocation of capital.
From the 8.8% decline reported by the industry in the same period, we infer that Lindsay Australia and its industry are both shrinking at a similar rate.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is LAU fairly valued? This infographic on the company's intrinsic value has everything you need to know.