Are the fundamentals of Ponsse Oyj (HEL: PON1V) good enough to justify buying given recent weakness in the stock?

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It’s hard to get excited after looking at the recent performance of Ponsse Oyj (HEL: PON1V), as its stock has fallen 7.0% in the past week. However, the fundamentals of the company look pretty decent, and long-term financial data is generally aligned with future market price movements. In this article, we have decided to focus on Ponsse Oyj’s ROE.

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 other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.

Check out our latest review for Ponsse Oyj

How to 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, Ponsse Oyj’s ROE is:

20% = 54 million euros 266 million euros (based on the last twelve months up to June 2021).

“Return” refers to a company’s profits over the past year. Another way to look at this is that for every $ 1 in shares, the company was able to make $ 0.20 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. We now need to assess how much profit the company is reinvesting or “holding back” for future growth, which then gives us an idea of ​​the growth potential of the company. 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.

Ponsse Oyj profit growth and 20% ROE

First, we recognize that Ponsse Oyj has a significantly high ROE. Secondly, a comparison with the industry-reported average ROE of 11% doesn’t go unnoticed for us either. Needless to say, we are quite surprised to see that Ponsse Oyj’s bottom line has declined by 2.4% over the past five years. So there could be other aspects that could explain this. For example, the company may have a high payout ratio or the company may have misallocated capital, for example.

From the 2.5% drop reported by the industry over the same period, we infer that Ponsse Oyj and his industry are both declining at a similar rate.

HLSE: PON1V Past Profit Growth September 19, 2021

Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This then helps them determine whether the stock is set for a bright or dark future. If you are wondering about the valuation of Ponsse Oyj, check out this gauge of its price / earnings ratio, compared to its sector.

Is Ponsse Oyj using its profits effectively?

Considering his three-year median payout rate of 42% (or a retention rate of 58%), which is pretty normal, Ponsse Oyj’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. It seems that there could be other reasons for the lack in this regard. For example, the business could be in decline.

Additionally, Ponsse Oyj has been paying dividends for at least ten years or more, suggesting that management must have perceived that shareholders prefer dividends over earnings growth. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 38%. Therefore, the company’s future ROE is also unlikely to change much, with analysts predicting an ROE of 19%.

Conclusion

Overall, we think Ponsse Oyj has some positive attributes. However, we are disappointed to see a lack of earnings growth despite a high ROE and a high reinvestment rate. We believe there could be external factors that could negatively impact the business. That said, looking at current analysts’ estimates, we found that the company’s earnings growth rate is expected to see a huge improvement. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to be redirected to our business analyst forecasts page.

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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 does not have any position in the mentioned stocks.
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