Yahoo Finance Will Weakness in Ultra Electronics Holdings plc's (LON:ULE) Stock Prove Temporary Given Strong Fundamentals?
It is hard to get excited after looking at Ultra Electronics Holdings' (LON:ULE) recent performance, when its stock has declined 3.1% over the past month. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Ultra Electronics Holdings' ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for Ultra Electronics Holdings
How To Calculate Return On Equity?
Return on equity 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 Ultra Electronics Holdings is:
18% = UK£84m ÷ UK£465m (Based on the trailing twelve months to December 2020).
The 'return' is the yearly profit. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.18.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.
Ultra Electronics Holdings' Earnings Growth And 18% ROE
To begin with, Ultra Electronics Holdings seems to have a respectable ROE. Especially when compared to the industry average of 12% the company's ROE looks pretty impressive. Probably as a result of this, Ultra Electronics Holdings was able to see a decent growth of 13% over the last five years.
As a next step, we compared Ultra Electronics Holdings' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 9.7%.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is ULE fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Ultra Electronics Holdings Using Its Retained Earnings Effectively?
The high three-year median payout ratio of 75% (or a retention ratio of 25%) for Ultra Electronics Holdings suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Moreover, Ultra Electronics Holdings is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 43% over the next three years. Regardless, the ROE is not expected to change much for the company despite the lower expected payout ratio.
Conclusion
In total, we are pretty happy with Ultra Electronics Holdings' 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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.
This article by Simply Wall St is general in nature. 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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