It's hard to get excited about SOCO's (ASX:SOC) recent performance, with its share price down 53% in the past three months. To determine whether this trend continues, we decided to focus on the weakness in the fundamentals that shape long-term market trends. In this article, we decided to focus on his ROE for SOCO.
Return on equity or ROE is a key measure used to evaluate how efficiently a company's management is utilizing the company's capital. Simply put, it is used to evaluate a company's profitability compared to its equity.
Check out our latest analysis for SOCO.
How do I calculate return on equity?
of ROE calculation formula teeth:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
So, based on the above formula, the ROE for SOCO is:
4.5% = AU$350,000 ÷ AU$7.8 million (based on trailing twelve months to December 2023).
“Return” is the annual profit. This means that for every A$1 a shareholder invests, the company will generate a profit of A$0.05 for him.
Why is ROE important for 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”. Generally speaking, other things being equal, companies with high return on equity and profit retention will have higher growth rates than companies without these attributes.
A side-by-side comparison of SOCO's earnings growth and 4.5% ROE
At first glance, SOCO's ROE doesn't seem to be all that interesting. Next, when compared to the industry average for his ROE of 6.4%, we find the company's ROE even less encouraging. So SOCO's 10% decline in net income over five years is not surprising considering its declining ROE. We believe there may be other aspects that are negatively impacting the company's earnings outlook. For example: low revenue retention or inadequate capital allocation.
However, when we compare SOCO's growth with the industry, we find that the company's revenue has been shrinking, while the industry has grown its revenue at 15% over the same period. This is very worrying.
The foundations that give a company value have a lot to do with its revenue growth. It's important for investors to know whether the market is pricing in a company's expected earnings growth (or decline). That way, you'll know if the stock is headed for clear blue waters or if a swamp awaits. Is SOCO valued fairly compared to other companies? These three valuation metrics may help you decide.
Is SOCO effectively utilizing its retained earnings?
With a high three-year median payout ratio of 66% (meaning 34% of profits are retained), most of SOCO's profits are paid out to shareholders, which explains the company's shrinking earnings. ing. The business is left with only a small amount of capital that can be reinvested. This is a vicious cycle that does not benefit the company in the long run. The risks dashboard displays the seven risks he has identified regarding SOCO.
Additionally, SOCO only recently started paying dividends. Therefore, it appears that management may have realized that shareholders were supportive of the dividend despite declining profits.
conclusion
Overall, SOCO's performance is quite disappointing. The company hasn't reinvested much into its business, and given its low ROE, it wouldn't be surprising to see no or no growth in its earnings. So far, we've only briefly covered the company's revenue growth.So it might be worth checking this free Detailed graph View SOCO's past earnings, revenue, and cash flow to gain deeper insight into the company's performance.
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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be 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.
