Most readers already know that shares of COVER 50 (BIT:COV) have risen a significant 20% over the past three months. Since stock prices are usually aligned with a company’s financial performance over the long term, we decided to take a closer look at its financial indicators to see if they had a role to play in the recent price movement. . Specifically, we decided to study the ROE of COVER 50 in this article.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
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How do you calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for COVER 50 is:
14% = €4.3m ÷ €30m (based on the last twelve months to June 2022).
The “return” is the annual profit. This means that for every €1 of equity, the company generated €0.14 of profit.
What is the relationship between ROE and earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate relative to companies that don’t necessarily exhibit these characteristics.
COVER 50 earnings growth and ROE of 14%
To begin with, the ROE of COVER 50 seems acceptable. Compared to the industry average ROE of 11%, the company’s ROE looks quite remarkable. For this reason, COVER 50’s 9.4% decline in net income over five years raises the question of why high ROE has not translated into earnings growth. Therefore, there could be other aspects that could explain this. For example, the company may have a high payout ratio or the company may have misallocated capital, for example.
In a next step, we compared the performance of COVER 50 with the industry and found that the performance of COVER 50 is depressing even compared to the industry, which has reduced its profits at a rate of 5.6% in the over the same period, which is slower than the company. .
Earnings growth is an important metric to consider when evaluating a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. By doing so, he will get an idea if the title is heading for clear blue waters or if swampy waters await. Is COVER 50 correctly valued compared to other companies? These 3 assessment metrics might help you decide.
Does COVER 50 use its benefits effectively?
COVER 50 has a high three-year median payout ratio of 63% (i.e. it retains 37% of its profits). This suggests that the company pays out most of its profits in the form of dividends to its shareholders. This partly explains why his income has declined. With only a small portion reinvested in the business, earnings growth would obviously be weak or non-existent. Our risk dashboard should have the 3 risks we identified for COVER 50.
Additionally, COVER 50 has paid dividends over a seven-year period, meaning the company’s management is instead focused on maintaining its dividend payouts regardless of declining earnings.
Overall, we feel COVER 50 has positive attributes. However, we are disappointed to see a lack of earnings growth, even despite high ROE. Keep in mind that the company reinvests a small portion of its profits, which means that investors do not reap the benefits of the high rate of return. So far, we have only made a short study of the company’s growth data. To better understand COVER 50’s past earnings growth, check out this visualization of past earnings, revenue, and cash flow.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.