One Stop Systems’ ROE.” data-reactid=”28″ type=”text”>One Stop Systems’ (NASDAQ:OSS) stock is up by a considerable 38% over the past three months. However, we wonder if the company’s inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on One Stop Systems’ ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
How To Calculate Return On Equity?
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for One Stop Systems is:
1.9% = US$531k ÷ US$27m (Based on the trailing twelve months to June 2020).
The ‘return’ is the amount earned after tax over the last twelve months. That means that for every $1 worth of shareholders’ equity, the company generated $0.02 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 One Stop Systems’ Earnings Growth And 1.9% ROE
It is hard to argue that One Stop Systems’ ROE is much good in and of itself. Even compared to the average industry ROE of 7.9%, the company’s ROE is quite dismal. Therefore, it might not be wrong to say that the five year net income decline of 33% seen by One Stop Systems was possibly a result of it having a lower ROE. We reckon that there could also be other factors at play here. For instance, the company has a very high payout ratio, or is faced with competitive pressures.
So, as a next step, we compared One Stop Systems’ performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 11% in the same period.
check if One Stop Systems is trading on a high P/E or a low P/E, relative to its industry.” data-reactid=”58″ type=”text”>The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 One Stop Systems is trading on a high P/E or a low P/E, relative to its industry.
Is One Stop Systems Making Efficient Use Of Its Profits?
Because One Stop Systems doesn’t pay any dividends, we infer that it is retaining all of its profits, which is rather perplexing when you consider the fact that there is no earnings growth to show for it. So there could be some other explanations in that regard. For instance, the company’s business may be deteriorating.
Click here to be taken to our analyst’s forecasts page for the company.” data-reactid=”66″ type=”text”>On the whole, we feel that the performance shown by One Stop Systems can be open to many interpretations. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Having said that, looking at current analyst estimates, we found that the company’s earnings growth rate is expected to see a huge improvement. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company.
This article by Simply Wall St is general in nature. 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.