Enghouse Systems Limited's (TSE:ENGH) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

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

Sun, Feb 9, 2025, 6:35 AM 4 min read

With its stock down 8.9% over the past three months, it is easy to disregard Enghouse Systems (TSE:ENGH). 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 Enghouse Systems' 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Enghouse Systems

How To Calculate Return On Equity?

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 Enghouse Systems is:

14% = CA$81m ÷ CA$596m (Based on the trailing twelve months to October 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.14 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Enghouse Systems' Earnings Growth And 14% ROE

To begin with, Enghouse Systems seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 14%. Given the circumstances, we can't help but wonder why Enghouse Systems saw little to no growth in the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

As a next step, we compared Enghouse Systems' net income growth with the industry and discovered that the industry saw an average growth of 30% in the same period.

past-earnings-growth — TSX:ENGH Past Earnings Growth February 9th 2025

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Enghouse Systems''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Enghouse Systems Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 53% (meaning, the company retains only 47% of profits) for Enghouse Systems suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Additionally, Enghouse Systems has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 77% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.

Conclusion

On the whole, we do feel that Enghouse Systems has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.