Most readers would already be aware that Salamis Tours (Holdings)’s (CSE:SAL) stock increased significantly by 20% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company’s key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Salamis Tours (Holdings)’s ROE in this article.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
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 Salamis Tours (Holdings) is:
15% = €6.5m ÷ €43m (Based on the trailing twelve months to June 2020).
The ‘return’ is the income the business earned over the last year. That means that for every €1 worth of shareholders’ equity, the company generated €0.15 in profit.
What Has ROE Got To Do With 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.
Salamis Tours (Holdings)’s Earnings Growth And 15% ROE
To begin with, Salamis Tours (Holdings) seems to have a respectable ROE. Especially when compared to the industry average of 2.0% the company’s ROE looks pretty impressive. However, for some reason, the higher returns aren’t reflected in Salamis Tours (Holdings)’s meagre five year net income growth average of 3.2%. That’s a bit unexpected from a company which has such a high rate of return. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or poor allocation of capital.
Next, on comparing with the industry net income growth, we found that Salamis Tours (Holdings)’s reported growth was lower than the industry growth of 10% in the same period, which is not something we like to see.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). 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 Salamis Tours (Holdings) is trading on a high P/E or a low P/E, relative to its industry.
Is Salamis Tours (Holdings) Efficiently Re-investing Its Profits?
Despite having a moderate three-year median payout ratio of 36% (implying that the company retains the remaining 64% of its income), Salamis Tours (Holdings)’s earnings growth was quite low. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.
In addition, Salamis Tours (Holdings) has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.
In total, it does look like Salamis Tours (Holdings) has some positive aspects to its business. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. 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. To know the 2 risks we have identified for Salamis Tours (Holdings) visit our risks dashboard for free.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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