InterCard Informationssysteme’s (FRA:II8) stock is up by a considerable 19% over the past three months. We wonder if and what role the company’s financials play in that price change as a company’s long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to InterCard Informationssysteme’s ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. Put another way, it reveals the company’s success at turning shareholder investments into profits.
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 InterCard Informationssysteme is:
7.6% = €615k ÷ €8.1m (Based on the trailing twelve months to December 2020).
The ‘return’ is the profit over the last twelve months. That means that for every €1 worth of shareholders’ equity, the company generated €0.08 in profit.
Why Is ROE Important For 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
InterCard Informationssysteme’s Earnings Growth And 7.6% ROE
At first glance, InterCard Informationssysteme’s ROE doesn’t look very promising. Although a closer study shows that the company’s ROE is higher than the industry average of 6.2% which we definitely can’t overlook. But then again, seeing that InterCard Informationssysteme’s net income shrunk at a rate of 8.3% in the past five years, makes us think again. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Therefore, the decline in earnings could also be the result of this.
So, as a next step, we compared InterCard Informationssysteme’s performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 7.5% in the same period.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you’re wondering about InterCard Informationssysteme’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is InterCard Informationssysteme Using Its Retained Earnings Effectively?
InterCard Informationssysteme doesn’t pay any dividend, meaning that the company is keeping all of its profits, which makes us wonder why it is retaining its earnings if it can’t use them to grow its business. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
In total, it does look like InterCard Informationssysteme has some positive aspects to its business. Yet, the low earnings growth is a bit concerning, especially given that the company has a respectable rate of return and is reinvesting a huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that’s preventing growth. While we won’t completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 3 risks we have identified for InterCard Informationssysteme.
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