Flowtech Fluidpower plc (LON:FLO) Stock's On A Decline: Are Poor Fundamentals The Cause?

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Simply Wall St

Wed, May 4, 2022, 2:59 AM 4 min read

With its stock down 6.9% over the past month, it is easy to disregard Flowtech Fluidpower (LON:FLO). To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Specifically, we decided to study Flowtech Fluidpower's ROE in this article.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Flowtech Fluidpower

How Do You Calculate Return On Equity?

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 Flowtech Fluidpower is:

2.4% = UK£2.1m ÷ UK£88m (Based on the trailing twelve months to December 2021).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.02 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. 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.

A Side By Side comparison of Flowtech Fluidpower's Earnings Growth And 2.4% ROE

As you can see, Flowtech Fluidpower's ROE looks pretty weak. Even compared to the average industry ROE of 19%, the company's ROE is quite dismal. Given the circumstances, the significant decline in net income by 36% seen by Flowtech Fluidpower over the last five years is not surprising. We reckon that there could also be other factors at play here. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

However, when we compared Flowtech Fluidpower's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 11% in the same period. This is quite worrisome.

past-earnings-growth — AIM:FLO Past Earnings Growth May 4th 2022

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Flowtech Fluidpower fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Flowtech Fluidpower Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 58% (implying that 42% of the profits are retained), most of Flowtech Fluidpower's profits are being paid to shareholders, which explains the company's shrinking earnings. With only very little left to reinvest into the business, growth in earnings is far from likely. To know the 2 risks we have identified for Flowtech Fluidpower visit our risks dashboard for free.

In addition, Flowtech Fluidpower has been paying dividends over a period of eight years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 26% over the next three years.

Conclusion

On the whole, Flowtech Fluidpower's performance is quite a big let-down. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.