Yahoo Finance Are Robust Financials Driving The Recent Rally In Lycopodium Limited's (ASX:LYL) Stock?
Lycopodium's (ASX:LYL) stock is up by a considerable 5.8% over the past week. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Lycopodium's ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Lycopodium
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 Lycopodium is:
45% = AU$55m ÷ AU$122m (Based on the trailing twelve months to December 2023).
The 'return' is the income the business earned over the last year. That means that for every A$1 worth of shareholders' equity, the company generated A$0.45 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
Lycopodium's Earnings Growth And 45% ROE
Firstly, we acknowledge that Lycopodium has a significantly high ROE. Secondly, even when compared to the industry average of 12% the company's ROE is quite impressive. As a result, Lycopodium's exceptional 30% net income growth seen over the past five years, doesn't come as a surprise.
Next, on comparing with the industry net income growth, we found that Lycopodium's growth is quite high when compared to the industry average growth of 21% in the same period, which is great to see.
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. If you're wondering about Lycopodium's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Lycopodium Making Efficient Use Of Its Profits?
Lycopodium has a significant three-year median payout ratio of 69%, meaning the company only retains 31% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.
Additionally, Lycopodium has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.
Summary
In total, we are pretty happy with Lycopodium's performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Lycopodium's past profit growth, check out this visualization of past earnings, revenue and cash flows.
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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.
