4Sight Holdings (JSE:4SI) has had a rough three months with its share price down 17%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study 4Sight Holdings’ ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
View our latest analysis for 4Sight Holdings
Return on equity can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for 4Sight Holdings is:
9.2% = R28m ÷ R309m (Based on the trailing twelve months to February 2024).
The ‘return’ is the amount earned after tax over the last twelve months. Another way to think of that is that for every ZAR1 worth of equity, the company was able to earn ZAR0.09 in profit.
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
As you can see, 4Sight Holdings’ ROE looks pretty weak. Even compared to the average industry ROE of 24%, the company’s ROE is quite dismal. In spite of this, 4Sight Holdings was able to grow its net income considerably, at a rate of 57% in the last five years. We believe that there might be other aspects that are positively influencing the company’s earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.
As a next step, we compared 4Sight Holdings’ 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 37%.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 4Sight Holdings is trading on a high P/E or a low P/E, relative to its industry.
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