Perimeter Solutions (NYSE:PRM) has been doing well on the stock market, with its stock up a significant 61% over the past three months. Since a company's long-term fundamentals typically drive market outcomes, we wonder what role, if any, a company's financials play in price movements. I am thinking. In particular, I would like to pay attention to Perimeter Solutions' ROE today.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it receives from its shareholders. More simply, it measures a company's profitability in relation to shareholder equity.
See our latest analysis on Perimeter Solutions.
How do I calculate return on equity?
Return on equity can be calculated using the following formula:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
So, based on the above formula, the ROE for the Perimeter solution is:
5.9% = USD 67 million ÷ USD 1.2 billion (based on trailing twelve months to December 2023).
“Return” refers to a company's earnings over the past year. This means that for every $1 of shareholders' equity, the company generated $0.06 in profit.
What relationship does ROE have with profit growth?
It has already been established that ROE serves as an indicator of how efficiently a company will generate future profits. We are then able to evaluate a company's future ability to generate profits based on how much of its profits it chooses to reinvest or “retain”. Assuming everything else remains constant, the higher the ROE and profit retention, the higher the company's growth rate compared to companies that don't necessarily have these characteristics.
Perimeter Solutions' revenue growth and ROE 5.9%
At first glance, Perimeter Solutions' ROE doesn't look very attractive. Next, when compared to the industry average for his ROE of 13%, his ROE for the company is even less encouraging. However, we can see that Perimeter Solutions has grown its net income modestly at 9.2% over the past five years. Therefore, there may be other aspects that are positively impacting the company's revenue growth. For example, the company's management may have made some good strategic decisions, or the company may have a low dividend payout ratio.
As a next step, we compared Perimeter Solutions' net income growth with its industry, and we were disappointed to see that the company's growth rate was lower than the industry average growth rate of 14% over the same period.
Earnings growth is a big factor in stock valuation. Investors should check whether expected growth or decline in earnings has been factored in in any case. This will help you determine whether the stock's future is bright or bleak. Is Perimeter Solutions significantly valued compared to other companies? These 3 rating metrics can help you decide.
Does Perimeter Solutions effectively reinvest profits?
Perimeter Solutions does not pay dividends. This means that all profits are reinvested into the business, which explains the company's considerable revenue growth.
conclusion
Overall, there seem to be some positive aspects to Perimeter Solutions' business. Specifically, we're talking about a fairly high earnings growth rate, which is undoubtedly backed up by the company's high earnings retention rate. Still, a low ROE means that reinvestment isn't providing much benefit to investors. We don't want to completely fire the company, but we do try to see how risky the business is in order to make more informed decisions about the company. You can learn about the two risks we have identified for perimeter solutions by visiting our website. risk dashboard It is available for free on this platform.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and the articles are not intended as financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
