Will the market correct the stock price in the future?

Pollard Banknote (TSE:PBL) had a tough three months with its share price down 6.5%. However, stock prices are usually determined by a company’s long-term finances, which in this case seem quite respectable. In this article, we decided to focus on the ROE of Pollard Banknote.

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.

See our latest analysis for Pollard Banknote

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 formula above, the ROE for Pollard Banknote is:

6.0% = C$13 million ÷ C$226 million (based on trailing 12 months to June 2022).

“Yield” refers to a company’s earnings over the past year. This therefore means that for every C$1 of investment by its shareholder, the company generates a profit of C$0.06.

What is the relationship between ROE and earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. 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.

Pollard Banknote earnings growth and ROE of 6.0%

When you first look at it, Pollard Banknote’s ROE doesn’t look that appealing. We then compared the company’s ROE to the entire industry and were disappointed to see that the ROE is below the industry average of 13%. However, the moderate 10% growth in net income seen by Pollard Banknote over the past five years is definitely positive. Thus, there could be other aspects that positively influence the profit growth of the company. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.

Considering the fact that industry profits fell 2.8% over the same period, the company’s net profit growth is quite remarkable.

past earnings-growth

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. This will help him determine if the future of the stock looks bright or ominous. A good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check if Pollard Banknote is trading on a high P/E or a low P/E, relative to its industry.

Does Pollard Banknote effectively reinvest its profits?

Pollard Banknote has a low three-year median payout ratio of 20%, which means the company keeps the remaining 80% of its profits. This suggests that the management reinvests most of the profits to grow the business.

Moreover, Pollard Banknote has paid dividends over a period of at least ten years, which means that the company is quite serious about sharing its profits with its shareholders.

Summary

Overall, we think Pollard Banknote has positive attributes. With a high reinvestment rate, albeit at a low ROE, the company managed to see considerable growth in earnings. That said, the latest analyst forecasts show that the company will continue to see earnings expansion. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.

Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

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.

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