Is the recent price movement of Sopheon plc (LON:SPE) supported by its weak fundamentals?
Sopheon (LON:SPE) had a tough three months with its share price down 32%. However, we decided to study the company’s financial statements to determine if they had anything to do with the price drop. Long-term fundamentals are usually what drive market outcomes, so pay close attention to them. Specifically, we decided to study Sopheon’s ROE in this article.
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 short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.
See our latest analysis for Sopheon
How do you calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Sopheon is:
2.6% = $817,000 ÷ $31 million (based on trailing 12 months to December 2021).
“Yield” refers to a company’s earnings over the past year. Another way to think about this is that for every £1 of equity, the company was able to earn £0.03 of profit.
Why is ROE important for earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. Based on the share of its profits that 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.
Sopheon earnings growth and ROE of 2.6%
It’s hard to say that Sopheon’s ROE is very good on its own. Not only that, even compared to the industry average of 9.3%, the company’s ROE is quite unremarkable. Therefore, it may not be wrong to say that the 28% decline in net income over five years observed by Sopheon was possibly the result of lower ROE. We believe there could also be other aspects that negatively influence the company’s earnings outlook. Such as – low income retention or poor capital allocation.
That being said, we benchmarked Sopheon’s performance against the industry and were concerned when we found that while the company had cut profits, the industry had increased profits at a rate of 13% over the course of the same period.
Earnings growth is an important factor in stock valuation. 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. Is Sopheon correctly valued compared to other companies? These 3 assessment metrics might help you decide.
Does Sopheon effectively reinvest its profits?
Despite a normal three-year median payout ratio of 25% (where it keeps 75% of its earnings), Sopheon has seen declining earnings, as seen above. So there could be other explanations for this. For example, the company’s business may deteriorate.
Additionally, Sopheon has paid dividends over a four-year period, suggesting that maintaining dividend payouts is preferred by management even as earnings decline. Our latest analyst data shows that the company’s future payout ratio is expected to reach 39% over the next three years. Still, forecasts suggest that Sopheon’s future ROE will hit 3.7% even though the company’s payout ratio is expected to increase. We speculate that other characteristics of the company could be driving the anticipated growth in the company’s ROE.
All in all, we’re a bit ambivalent about Sopheon’s performance. Although the company has a high earnings retention rate, its low rate of return is likely hampering its earnings growth. Additionally, after studying current analyst estimates, we have found that the company’s earnings are expected to continue to decline in the future. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
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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.