Should Weakness in Peter Warren Automotive Holdings Limited's (ASX:PWR) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?
With its stock down 9.1% over the past three months, it is easy to disregard Peter Warren Automotive Holdings (ASX:PWR). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Peter Warren Automotive Holdings' ROE today.
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 Peter Warren Automotive Holdings
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 Peter Warren Automotive Holdings is:
13% = AU$63m ÷ AU$487m (Based on the trailing twelve months to December 2022).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.13 in profit.
What Has ROE Got To Do With 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 Peter Warren Automotive Holdings' Earnings Growth And 13% ROE
At first glance, Peter Warren Automotive Holdings seems to have a decent ROE. Be that as it may, the company's ROE is still quite lower than the industry average of 20%. Still, we can see that Peter Warren Automotive Holdings has seen a remarkable net income growth of 37% over the past five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently. Bear in mind, the company does have a respectable ROE. It is just that the industry ROE is higher. So this also does lend some color to the high earnings growth seen by the company.
We then compared Peter Warren Automotive Holdings' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 21% in the same period.