Yahoo Finance Are Héroux-Devtek Inc.'s (TSE:HRX) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?
Héroux-Devtek (TSE:HRX) has had a rough month with its share price down 4.5%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Héroux-Devtek's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
View our latest analysis for Héroux-Devtek
How To Calculate Return On Equity?
ROE 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 Héroux-Devtek is:
5.0% = CA$19m ÷ CA$381m (Based on the trailing twelve months to December 2022).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.05 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
Héroux-Devtek's Earnings Growth And 5.0% ROE
On the face of it, Héroux-Devtek's ROE is not much to talk about. Next, when compared to the average industry ROE of 8.8%, the company's ROE leaves us feeling even less enthusiastic. Thus, the low net income growth of 3.4% seen by Héroux-Devtek over the past five years could probably be the result of the low ROE.
Next, on comparing Héroux-Devtek's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 3.4% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. What is HRX worth today? The intrinsic value infographic in our free research report helps visualize whether HRX is currently mispriced by the market.
Is Héroux-Devtek Efficiently Re-investing Its Profits?
Héroux-Devtek doesn't pay any dividend, which means that it is retaining all of its earnings. This doesn't explain the low earnings growth number that we discussed above. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.
Summary
On the whole, we do feel that Héroux-Devtek has some positive attributes. That is, a decent growth in earnings backed by a high rate of reinvestment. However, we do feel that that earnings growth could have been higher if the business were to improve on the low ROE rate. Especially given how the company is reinvesting a huge chunk of its profits. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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