Is SKAKO’s Stock Rally Tied To Its Strong Fundamentals?

SKAKO’s (CPH:SKAKO) stock is up by a considerable 60% over the past three months. Given the company’s impressive performance, we decided to study its financial indicators more closely as a company’s financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to SKAKO’s ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.

View our latest analysis for SKAKO

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for SKAKO is:

14% = kr.19m ÷ kr.133m (Based on the trailing twelve months to September 2022).

The ‘return’ is the income the business earned over the last year. That means that for every DKK1 worth of shareholders’ equity, the company generated DKK0.14 in profit.

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. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.

A Side By Side comparison of SKAKO’s Earnings Growth And 14% ROE

To begin with, SKAKO seems to have a respectable ROE. Further, the company’s ROE compares quite favorably to the industry average of 11%. This certainly adds some context to SKAKO’s exceptional 23% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared SKAKO’s 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 9.5%.

CPSE:SKAKO Past Earnings Growth January 25th 2023

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. One 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 prospects. So, you may want to check if SKAKO is trading on a high P/E or a low P/E, relative to its industry.

Is SKAKO Efficiently Re-investing Its Profits?

SKAKO’s significant three-year median payout ratio of 86% (where it is retaining only 14% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.

Besides, SKAKO has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

In total, we are pretty happy with SKAKO’s performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that’s not too bad. So far, we’ve only made a quick discussion around the company’s earnings growth. So it may be worth checking this free detailed graph or SKAKO’s past earnings, as well as revenue and cash flows to get a deeper insight into the company’s performance.

Valuation is complex, but we’re helping make it simple.

Find out whether SKAKO is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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