Are Scott Technology Limited (NZSE:SCT) shares on a downtrend due to poor financials?

With its shares down 3.7% over the past month, it’s easy to overlook Scott Technology (NZSE:SCT). We decided to study a company’s financials to determine whether the downward trend will continue, as a company’s long-term performance often determines market outcomes. In this article, we decided to focus on Scott Technology’s ROE.

ROE, or return on equity, is a useful tool for evaluating how effectively a company is earning a return on investment from its shareholders. Simply put, it is used to assess the profitability of a company relative to its share capital.

Check out our latest analysis for Scott Technology

How is ROE calculated?

This ROE formula Yes:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

Therefore, according to the above formula, Scott Technology’s ROE is:

9.2% = NZ$9.6 million ÷ NZ$104 million (based on the trailing 12 months to February 2022).

“Return” refers to the company’s earnings over the past year. One way to conceptualize this is that for every NZ$1 of shareholder capital the company has, it earns NZ$0.09 in profit.

What does ROE have to do with earnings growth?

So far, we’ve seen that ROE measures a company’s efficiency in generating profits. Based on how much profit a company chooses to reinvest or “keep”, we can assess the company’s ability to generate profits in the future. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the company’s growth rate compared to companies that don’t necessarily share these characteristics.

A Side-by-Side Comparison of Scott Technology’s Earnings Growth and 9.2% ROE

On the surface, Scottrade’s ROE isn’t much to say. However, a more in-depth study shows that the company’s ROE is similar to the industry average of 11%. That being said, Scott Technology’s five-year net income decline rate was 22%. Keep in mind that the company does have a slightly lower ROE. So a drop in earnings could also be the result.

So as a next step, we compared Scott Technology’s performance to the industry, and we were disappointed to find that while the company’s earnings had been shrinking, the industry’s earnings had grown at a 7.6% rate over the same period.

past earnings growth

past earnings growth

Earnings growth is an important factor in stock valuation. It’s important for investors to understand whether the market has already priced in a company’s expected earnings growth (or decline). This then helps them determine whether the stock’s future is bright or bleak. A good indicator of expected earnings growth is the price-to-earnings ratio, which determines what the market is willing to pay for a stock based on the earnings outlook. Therefore, you might want to check whether Scott Technology’s price-to-earnings ratio relative to its industry is high or low.

Is Scott Technology using its profits efficiently?

With a three-year median payout ratio of 57% (meaning 43% of profits retained), most of Scott Technology’s profits are paid to shareholders, which explains the company’s shrinking earnings. Businesses are left with only a fraction of their capital to reinvest—a vicious cycle that doesn’t benefit the company in the long run.

Additionally, Scott Technology has been paying a dividend for at least a decade, suggesting that it’s more important for management to keep the dividend paid, even at the expense of business growth.

in conclusion

In general, we will carefully consider before deciding on any investment action regarding Scott Technology. The company’s earnings growth has been sluggish because it retains very little profit, and whatever it retains, reinvests it at a very low rate of return. So far, we’ve only scratched the surface of the company’s past performance by looking at the company’s fundamentals.You can do your own research on Scott Technology and see how it has performed in the past Check it out for free Detailed chart or past earnings, income and cash flow.

Have feedback on this article? Care about content? keep in touch Contact us directly. Alternatively, email the editorial team (at)

This article by Simply Wall St is general in nature. We provide commentary based solely on historical data and analyst forecasts using an unbiased methodology and our articles are not intended to provide financial advice. It does not constitute advice 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 analytics driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Wall Street has no positions in any of the stocks mentioned.

Join Paid User Research Sessions
you will receive a $30 Amazon Gift Card 1 hour while helping us build better investment vehicles for individual investors like you.Sign up gentlemen

Source link