Pressman Advertising (NSE: PRESSMN) shares have risen 24% in the past three months. Since stock prices are generally aligned with a company’s long-term financial performance, we decided to take a closer look at its financial metrics to see if they had a role to play in the recent price movement. . Specifically, we decided to study Pressman Advertising‘s ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. Simply put, it is used to assess a company’s profitability against its equity.
See our latest analysis for Pressman Advertising
How to calculate return on equity?
the return on equity formula is:
Return on equity = Net income (from continuing operations) Ã· Equity
Thus, based on the above formula, Pressman Advertising’s ROE is:
12% = â¹ 53m â¹ 428m (Based on the last twelve months up to June 2021).
The “return” is the income the business has earned over the past year. Another way to think about this is that for every 1 value of equity, the company was able to make 0.12 profit.
What is the relationship between ROE and profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. 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.
Pressman Advertising profit growth and 12% ROE
At first glance, Pressman Advertising’s ROE doesn’t look very promising. However, the fact that its ROE is well above the industry average of 10% does not go unnoticed to us. But then again, seeing that Pressman Advertising’s net income has declined 2.8% over the past five years makes us think again. Keep in mind that the business has a slightly low ROE. It’s just that the industry’s ROE is lower. Therefore, lower income could also be the result of this.
However, when we compared Pressman Advertising’s growth with the industry, we found that even though the company’s profits declined, the industry experienced 1.5% profit growth over the same period. period. It is quite worrying.
Profit growth is an important metric to consider when valuing a stock. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This will help them determine whether the future of the stock looks bright or threatening. If you’re wondering about Pressman Advertising’s assessment, check out this gauge of its price / earnings ratio, relative to its industry.
Is Pressman Advertising Efficiently Using Retained Earnings?
Looking at its three-year median distribution rate of 44% (or a retention rate of 56%), which is pretty normal, Pressman Advertising’s decline in earnings is rather disconcerting as one would expect to see good growth. when a company keeps a good portion of its profits. There could therefore be other explanations in this regard. For example, the business of the company can deteriorate.
In addition, Pressman Advertising paid dividends over an eight-year period, suggesting that maintaining dividend payments is preferred by management, even when profits are declining.
All in all, it seems that Pressman Advertising has positive aspects for its business. However, although the company has a decent ROE and high profit retention, its profit growth figure is quite disappointing. This suggests that there could be an external threat to the business, hampering growth. While we don’t completely reject the business, what we would do is try to determine how risky the business is in order to make a more informed decision about the business. To learn about the 5 risks we have identified for Pressman Advertising, visit our free risk dashboard.
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