Should the weakness of Gates Industrial Corporation plc (NYSE: GTES) shares be taken as a sign that the market will correct the share price given decent financial data?
It’s hard to get excited after looking at the recent performance of Gates Industrial (NYSE: GTES), as its stock has fallen 8.3% in the past three months. But if you pay close attention to it, you might find that its key financial metrics look pretty decent, which could mean the stock could potentially rise in the long term given how markets typically reward long-term fundamentals. more resistant term. Specifically, we decided to study Gates Industrial’s ROE in this article.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how effectively their capital is being reinvested. In simpler terms, it measures a company’s profitability relative to equity.
How do you calculate return on equity?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, Gates Industrial’s ROE is:
7.7% = US $ 260 million ÷ US $ 3.4 billion (based on the last twelve months to July 2021).
The “return” is the income the business has earned over the past year. This means that for every dollar in shareholders’ equity, the company generated $ 0.08 in profit.
What does ROE have to do with 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. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
A side-by-side comparison of Gates Industrial’s profit growth and 7.7% ROE
At first glance, Gates Industrial’s ROE does not look very promising. We then compared the company’s ROE to that of the industry as a whole and were disappointed to find that the ROE is 12% below the industry average. Still, Gates Industrial has achieved a decent net income growth of 13% over the past five years. So the company’s profit growth could probably have been caused by other variables. Such as – high profit retention or effective management in place.
We then compared the net income growth of Gates Industrial with the industry and we are delighted to see that the growth number of the company is higher than that of the industry which has a growth rate of 8.3. % during the same period.
NYSE: GTES Past Profit Growth September 25, 2021
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 then helps them determine whether the stock is set for a bright or dark future. Is Gates Industrial properly rated against other companies? These 3 evaluation measures could help you decide.
Is Gates Industrial Reinvesting Profits Effectively?
Gates Industrial does not currently pay any dividends, which essentially means that it has reinvested all of its profits back into the business. It certainly contributes to the decent profit growth figure we discussed above.
Overall, we think Gates Industrial certainly has some positive factors to consider. Even despite the low rate of return, the company has shown impressive profit growth by reinvesting heavily in its operations. That said, the latest forecast from industry analysts shows that the company’s earnings are expected to pick up. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
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 documents. Simply Wall St has no position in the mentioned stocks.
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