Could the market be wrong about SimCorp A / S (CPH: SIM) given its attractive financial outlook?
It’s hard to get excited after looking at the recent performance of SimCorp (CPH: SIM), as its stock has fallen 8.0% in the past three months. But if you pay close attention to it, you might understand that its strong financial data could mean that the stock could potentially see its value rise in the long run, given how the markets typically reward companies with good health. financial. In particular, we will be paying close attention to SimCorp’s ROE today.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.
See our latest review for SimCorp
How is the ROE calculated?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for SimCorp is:
37% = 98 million euros ÷ 269 million euros (based on the last twelve months up to June 2021).
“Return” refers to a company’s profits over the past year. Another way to look at this is that for every DKK 1 value of equity, the company was able to make a profit of DKK 0.37.
What does ROE have to do with profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. Based on how much of those profits the company reinvests or “withholds” and how efficiently it does so, we are then able to assess a company’s profit growth potential. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
SimCorp profit growth and 37% ROE
First, we recognize that SimCorp has a significantly high ROE. Second, a comparison with the industry-reported average ROE of 15% doesn’t go unnoticed for us either. This likely laid the foundation for SimCorp’s moderate 13% net income growth seen over the past five years.
We then compared SimCorp’s net income growth with the industry and found that the company’s growth figure is lower than the industry’s average growth rate of 17% over the same period, which is a bit disturbing.
Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This then helps them determine whether the stock is set for a bright or dark future. If you’re wondering about SimCorp’s valuation, check out this gauge of its price / earnings ratio, relative to its industry.
Is SimCorp Efficiently Reinvesting Its Profits?
SimCorp has a three-year median payout ratio of 45%, which means it keeps the remaining 55% of its profits. This suggests that its dividend is well hedged, and given the decent growth the company is seeing, it looks like management is reinvesting its earnings in an efficient manner.
In addition, SimCorp has paid dividends over a period of at least ten years, which means the company is very serious about sharing its profits with its shareholders. After studying the latest consensus data from analysts, we found that the company is expected to continue to pay out around 43% of its profits over the next three years. As a result, SimCorp’s ROE is not expected to change much either, which we deduced from analysts’ estimate of 32% for future ROE.
Overall, we are quite happy with the performance of SimCorp. Specifically, we like the fact that the company reinvests a large portion of its profits at a high rate of return. This of course allowed the company to experience good profit growth. We also looked at the latest analysts’ forecast and found that the company’s profit growth is expected to be similar to its current growth rate. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is 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 material. Simply Wall St has no position in any of the stocks mentioned.
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