Does its finances have a role to play in Compucom Software Limited’s (NSE: COMPUSOFT) recent stock increase?
Compucom Software (NSE: COMPUSOFT) stock is up 91% in the past three months. As most know, fundamentals are what generally guide market price movements over the long term, so we decided to take a look at key financial indicators in business today to see if they have a role to play. play in the recent price movement. In particular, we’ll be paying attention to Compucom Software’s ROE today.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest analysis for Compucom Software
How is ROE calculated?
the ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Compucom Software is:
9.1% = ₹122 million ÷ ₹1.3 billion (based on the last twelve months to December 2021).
The “return” is the annual profit. This means that for every ₹ of equity, the company generated ₹0.09 of profit.
What does ROE have to do with earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
Compucom Software earnings growth and ROE of 9.1%
At first glance, Compucom Software’s ROE isn’t much to tell. However, the fact that its ROE is well above the industry average of 5.0% does not go unnoticed by us. Even more so after seeing Compucom Software’s exceptional 35% growth in net income over the past five years. That being said, the company has a slightly weak ROE to start with, just that it’s above the industry average. Thus, there may well be other reasons for income to rise. For example, it is possible that the industry at large is going through a phase of strong growth or that the company has a low distribution rate.
Given that the industry has been shrinking profits at a rate of 10.0% over the same period, the company’s net profit growth is quite impressive.
Earnings growth is an important factor in stock valuation. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This then helps them determine if the stock is positioned for a bright or bleak future. Is Compucom Software correctly valued compared to other companies? These 3 assessment metrics might help you decide.
Does Compucom Software use its profits effectively?
Compucom Software’s very high three-year median payout ratio of 122% suggests that the company pays more to its shareholders than it earns. Despite this, the company was able to increase its profits significantly, as we saw above. That said, the high payout rate is certainly risky and something to watch out for. To learn about the 4 risks we have identified for Compucom Software, visit our free Risk Dashboard.
Also, Compucom Software has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.
All in all, it seems that Compucom Software has positive aspects for its business. In particular the growth in profits which was based on a moderate ROE. Still, ROE could have been even better for investors had the company reinvested more of its earnings. As previously pointed out, the current reinvestment rate seems negligible. So far, we’ve only scratched the surface of the company’s past performance by looking at the company’s fundamentals. To better understand Compucom Software’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.