It’s hard to get excited after looking at the recent performance of Nexteer Automotive Group (HKG: 1316), as its stock has fallen 18% in the past three months. It seems that the market has completely ignored the positive aspects of the company’s fundamentals and decided to weigh more heavily on the negative aspects. Fundamentals usually dictate market outcomes, so it makes sense to study a company’s financial data. In this article, we have decided to focus on the ROE of Nexteer Automotive Group.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it has received from its shareholders. In other words, it is a profitability ratio that measures the rate of return on capital contributed by shareholders to the company.
See our latest analysis for Nexteer Automotive Group
How is the ROE calculated?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE of Nexteer Automotive Group is:
6.4% = $ 122 million ÷ $ 1.9 billion (based on the last twelve months up to December 2020).
The “return” is the profit of the last twelve months. This means that for every HK $ 1 worth of equity, the company generated HK $ 0.06 in profit.
What does ROE have to do with profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on how much of that profit the company reinvests or “withholds”, and how effectively it does so, we are then able to assess a company’s profit growth potential. Generally speaking, all other things being equal, companies with a high return on equity and profit retention have a higher growth rate than companies that do not share these attributes.
A side-by-side comparison of Nexteer Automotive Group profit growth and ROE of 6.4%
At first glance, the ROE of Nexteer Automotive Group is not much to say. Another quick study shows that the company’s ROE also doesn’t compare to the industry average of 9.5%. For this reason, Nexteer Automotive Group’s five-year net profit decline of 8.6% is not surprising given its lower ROE. However, other factors could also cause lower income. For example, it is possible that the company has misallocated capital or that the company has a very high payout ratio.
Secondly, we compared the performance of Nexteer Automotive Group to that of the industry and found that the performance of Nexteer Automotive Group is depressing even compared to the industry, which reduced its profits to a rate of 0, 02% over the same period, which is slower than the business.
Profit growth is an important factor in the valuation of stocks. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are ahead of them. What is 1316 worth today? The intrinsic value infographic in our free research report helps to visualize whether 1316 is currently poorly priced by the market.
Is Nexteer Automotive Group Efficiently Using Its Retained Earnings?
Nexteer Automotive Group’s low three-year median payout rate of 22% (implying it keeps the remaining 78% of its profits) comes as a surprise when you associate it with declining profits. This should generally not be the case when a business keeps most of its profits. It seems that there may be other reasons for the lack in this regard. For example, the business could be in decline.
Additionally, Nexteer Automotive Group has been paying dividends for the past seven years, which is a considerable amount of time, suggesting that management must have perceived that shareholders prefer consistent dividends even though earnings have declined. Looking at the latest analyst consensus data, we found that the company is expected to continue to pay out around 22% of its profits over the next three years. Anyway, the future ROE of Nexteer Automotive Group should reach 13% despite the little change expected in its payout ratio.
All in all, we are a little ambivalent about the performance of Nexteer Automotive Group. Although the company has a high reinvestment rate, the low ROE means that all that reinvestment does not yield any benefit to its investors, and moreover, it has a negative impact on profit growth. That said, we have looked at the latest analysts’ forecast and found that while the company has cut profits in the past, analysts expect its profits to rise in the future. Are these analyst expectations based on general industry expectations or on company fundamentals? Click here to go to our business analyst’s forecast page.
If you are looking for stocks to buy, use the cheapest platform * ranked # 1 overall by Barron’s, Interactive brokers. Trade stocks, options, futures, currencies, bonds and funds in 135 markets, all from one integrated account.
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in any of the stocks mentioned.
*Interactive Brokers Ranked Least Expensive Broker By StockBrokers.com Annual Online Review 2020
Do you have any comments on this article? Concerned about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.