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Most readers will already know that the Zotefoams (LON:ZTF) share price is up 4.7% over the past week. Given its impressive performance, we decided to study the company’s key financial metrics, since a company’s long-term fundamentals usually drive market outcomes. In this article, we decided to focus on his ROE for Zotefoams.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it receives from its shareholders. Simply put, it is used to evaluate a company’s profitability compared to its equity.
Check out our latest analysis for Zotefoams.
How is ROE calculated?
of ROE calculation formula teeth:
Return on equity = Net income (from continuing operations) ÷ Shareholders’ equity
So, based on the above formula, Zotefoams’ ROE is:
9.8% = GBP 11 million ÷ GBP 113 million (based on the trailing twelve months to December 2023).
“Return” is the annual profit. This means that for every £1 a shareholder invests, the company will generate a profit of £0.10 for him.
What is the relationship between ROE and profit growth rate?
So far, we have learned that ROE measures how efficiently a company is generating its profits. We are then able to evaluate a company’s future ability to generate profits based on how much of its profits it chooses to reinvest or “retain”. Generally, other things being equal, companies with high return on equity and profit retention will have higher growth rates than companies without these attributes.
Zotefoams’ revenue growth and ROE of 9.8%
Firstly, Zotefoams appears to have a respectable ROE. His ROE for the company looks quite remarkable when compared to the industry average of his ROE of 8.0%. But for some reason, Zotefoams’ average net income growth rate of 2.8% over just five years doesn’t reflect that high profit. This is interesting, as high returns should mean that the company has the ability to generate high growth, but for some reason it is not. We believe that low growth rates despite very high earnings may be the result of certain circumstances, such as low earnings retention or inadequate capital allocation.
As a next step, we compared Zotefoams’ net income growth with the industry and found that the company has a similar growth rate when compared to the industry average growth rate of 2.8% over the same period.
The foundations that give a company value have a lot to do with its revenue growth. The next thing investors need to determine is whether the expected earnings growth is already built into the stock price, or the lack thereof. That way, you’ll know if the stock is headed for clear blue waters or if a swamp awaits. Is ZTF fairly valued? This infographic on the company’s intrinsic value contains everything you need to know.
Is Zotefoams effectively utilizing its retained earnings?
Despite having a moderate three-year median payout ratio of 41% (meaning the company retains the remaining 59% of its earnings), Zotefoams’ earnings growth has been very low. It was. So there may be other reasons explaining the lack in that regard. For example, your business may decline.
Additionally, Zotefoams has been paying dividends for at least 10 years. This means the company’s management is determined to pay a dividend, even if the increase in profits means little. Researching the latest analyst consensus data, we found that the company’s future dividend payout ratio is expected to drop to 25% over the next three years.
conclusion
Overall, I’m pretty happy with Zotefoams’ performance. In particular, it’s great to see that the company has invested heavily in its business, delivering strong revenue growth, along with high rates of return. That said, the company’s revenue growth is expected to slow, according to the latest industry analyst forecasts. Are these analyst forecasts based on broader expectations for the industry, or are they based on the company’s fundamentals? Click here to be taken to our analyst forecasts page for the company .
Have feedback on this article? Curious about its content? contact Please contact us directly. Alternatively, email our editorial team at Simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
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