Detection Technology Oyj (HEL:DETEC) has been doing well in the stock market, with its shares up 38% over the past three months. However, we wonder if the company’s inconsistent financial profile will have any adverse impact on the current share price momentum.In this article, we decided to focus on ROE of Detection Technology Oyj.
ROE, or return on equity, is a useful tool for evaluating how effectively a company is generating a return on investment from its shareholders. In other words, it is the profitability ratio that measures the return on capital provided to a company’s shareholders.
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How to calculate ROE?
Return on equity can be calculated using the following formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
Therefore, according to the above formula, the return on equity of detection technology Oyj is:
11% = EUR 7.7 million ÷ EUR 72 million (based on the last twelve months to June 2022).
“Return” refers to a company’s earnings over the past year. One way to conceptualize this is that a company earns €0.11 in profit for every €1 of shareholder capital it has.
Why is ROE important for profitable growth?
We have established that ROE is an effective profit-generating metric for measuring a company’s future earnings. Based on how much of the company’s profits it chooses to reinvest, or “retain,” we can assess the company’s ability to generate profits in the future. In general, companies with high return on equity and profit retention have higher growth rates than companies without these attributes, other things being equal.
Side-by-side comparison of detection technology Oyj’s earnings growth and 11% return on equity
At first glance, Detection Technology Oyj’s ROE appears to be good. Even so, we’re not terribly excited compared to the industry average ROE of 17%. Also, Detection Technology Oyj’s net income has shrunk at a rate of 16% over the past five years. Don’t forget, the company already has a high ROE, just below the industry average. So there may be something else contributing to the shrinking earnings. For example, the company pays out a significant portion of its earnings as dividends, or is facing competitive pressure.
However, when we compare Detection Technology Oyj’s growth to the industry, we see that while the company’s earnings have been shrinking, the industry’s earnings have grown by 7.8% over the same period. This is very worrying.
To a large extent, the basis of a company’s value is tied to its earnings growth. Investors should try to determine whether expected earnings growth or decline (whichever the case may be) is priced in. Doing so will help them determine whether the stock’s future is promising or ominous.If you want to know the valuation of Detection Technology Oyj, check out This is a measure of its price-to-earnings ratio compared to its industry.
Is Detection Technology Oyj using its profits efficiently?
Detection Technology Oyj’s three-year median payout ratio is high at 54% (meaning 46% of profits are retained), with most of its profits paid out to shareholders, which explains the company’s shrinking earnings. Businesses are left with little money to reinvest—a vicious circle that is not good for the company in the long run.You can visit our website to see the 2 risks we have identified for Detection Technology Oyj Risk Dashboard free on our platform.
Furthermore, Detection Technology Oyj has paid a dividend for five years, which means the company’s management is fairly focused on keeping the dividend paid despite shrinking earnings. The company’s payout ratio is expected to drop to 40% over the next three years, according to existing analyst estimates. The company’s return on equity is expected to rise to 17% in the same period due to a lower payout ratio.
Overall, we have mixed feelings about Detection Technology Oyj. On the one hand, the company does have decent returns, however, its earnings growth numbers are rather disappointing and, as mentioned, growth is held back by low retained earnings. That being said, we’ve looked at the latest analyst forecasts and found that while the company’s earnings have shrunk in the past, analysts expect its earnings to grow in the future.To learn more about the latest analyst forecasts for the company, check out this Visualization of company analyst forecasts.
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This article by Simply Wall St is general in nature. We use only an unbiased methodology to provide reviews based on historical data and analyst forecasts, 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 into account your objectives or your financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any of the stocks mentioned.