Enghouse Systems (TSE:ENGH) stock is up 7.1% over the past three months. Since the market usually pays for a company’s long-term financial health, we decided to examine the company’s fundamentals to see if they could influence the market. Specifically, we decided to examine Enghouse Systems’ ROE in this article.
Return on equity or ROE is an important metric used to assess how efficiently management is using the company’s capital. In simple terms, it measures the profitability of a company in relation to its equity capital.
Check out our latest analysis for Enghouse Systems
How do you calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = net profit (from continuing operations) ÷ equity
So based on the above formula, the ROE for Enghouse Systems is:
16% = CA$84M ÷ CA$530M (Based on trailing twelve months ending July 2023).
The “return” is the amount earned after taxes over the last twelve months. One way to think of this is that for every CA$1 of shareholder capital, the company made CA$0.16 in profit.
What does ROE have to do with earnings growth?
We have already established that ROE serves as an efficient profit-generating measure of a company’s future earnings. Depending on how much of these profits the company reinvests or “retains” and how effectively it does so, we can then assess a company’s earnings growth potential. In general, companies with a high return on equity and profit retention, other things being equal, have a higher growth rate than companies that do not have these characteristics.
A side-by-side comparison of Enghouse Systems’ earnings growth and ROE of 16%
At first glance, Enghouse Systems appears to have a decent ROE. Furthermore, the company’s ROE of 17% is in line with the industry average. This may have laid the foundation for the decent 7.8% growth that Enghouse Systems has recorded over the last five years.
Next, when comparing with the industry’s net income growth, we found that Enghouse Systems’ reported growth was lower than the industry growth of 13% in the last few years, which we don’t like to see.
Earnings growth is an important factor in stock valuation. It is important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This will give them an idea of whether the stock is headed to clear, blue waters or whether swampy waters await them. What is ENGH worth today? The intrinsic value infographic in our free research report helps illustrate whether ENGH is currently mispriced by the market.
Is Enghouse Systems using its retained earnings effectively?
With a three-year average payout ratio of 39% (meaning the company retains 61% of its profits), it appears that Enghouse Systems is reinvesting efficiently, so it is posting respectable growth in its earnings and paying a good dividend cover.
Additionally, Enghouse Systems has paid dividends for at least ten years, meaning the company is very serious about sharing its profits with shareholders.
Overall, we are very satisfied with the performance of Enghouse Systems. We particularly like that the company reinvests heavily in its business, with a high return. Therefore, the decent profit growth is not surprising. However, an examination of recent analyst forecasts shows that the company is likely to see a slowdown in its future earnings growth. To know more about the company’s future earnings growth projections, check out here free Check out analyst forecasts for the company to find out more.
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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.