Should Weakness in SciDev Limited's (ASX:SDV) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?
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SciDev (ASX:SDV) has had a rough three months with its share price down 21%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on SciDev's ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
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 SciDev is:
4.0% = AU$2.1m ÷ AU$52m (Based on the trailing twelve months to December 2024).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.04.
Check out our latest analysis for SciDev
What Is The Relationship Between ROE And 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. 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.
SciDev's Earnings Growth And 4.0% ROE
As you can see, SciDev's ROE looks pretty weak. Even when compared to the industry average of 8.0%, the ROE figure is pretty disappointing. Despite this, surprisingly, SciDev saw an exceptional 32% net income growth over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.
Next, on comparing with the industry net income growth, we found that SciDev's growth is quite high when compared to the industry average growth of 7.6% in the same period, which is great to see.
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. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if SciDev is trading on a high P/E or a low P/E , relative to its industry.