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Nynomic (ETR:M7U) has had a rough three months with its share price down 15%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Nynomic'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.
Check out our latest analysis for Nynomic
How Is ROE Calculated?
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 Nynomic is:
9.6% = €10m ÷ €106m (Based on the trailing twelve months to June 2024).
The 'return' is the yearly profit. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.10.
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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Nynomic's Earnings Growth And 9.6% ROE
At first glance, Nynomic seems to have a decent ROE. Even when compared to the industry average of 8.2% the company's ROE looks quite decent. This probably goes some way in explaining Nynomic's moderate 13% growth over the past five years amongst other factors.
As a next step, we compared Nynomic's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 13% in the same period.
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 M7U fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Nynomic Using Its Retained Earnings Effectively?
Given that Nynomic doesn't pay any regular dividends to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.