Service Stream Limited (ASX:SSM) shares rally, but financials look ambiguous: Will the momentum continue?

Service Stream (ASX:SSM) stock is up 23% in the past three months. But the company’s key financial indicators seem to differ across the board, leading us to wonder whether the company’s current share price momentum can be sustained or not. Specifically, we decided to study Service Stream’s ROE in this article.

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.

Check out our latest analysis for Service Stream

How to calculate return on equity?

Return on equity can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the formula above, the ROE for Service Stream is:

3.6% = AU$18 million ÷ AU$511 million (based on trailing 12 months to December 2021).

“Yield” is the income the business has earned over the past year. One way to conceptualize this is that for every Australian dollar of share capital it has, the company has made a profit of 0.04 Australian dollars.

What is the relationship between ROE and earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.

Service Stream earnings growth and ROE of 3.6%

It’s hard to say that Service Stream’s ROE is very good on its own. Even compared to the industry average ROE of 12%, the company’s ROE is pretty dismal. Therefore, the steady earnings seen by Service Stream over the past five years could likely be the result of lower ROE.

We then benchmarked Service Stream’s net income growth with the industry and found that the company’s growth figure is below the industry average growth rate of 14% over the same period, which which is a little worrying.

ASX: SSM Past Earnings Growth May 3, 2022

Earnings growth is an important metric to consider when evaluating a stock. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. Has the market priced in the future prospects of SSM? You can find out in our latest infographic research report on intrinsic value.

Does Service Stream effectively reinvest its profits?

Although the company has paid a portion of its dividend in the past, it currently does not pay any dividend. We deduce that the company has reinvested all its profits to develop its activity.

Conclusion

All in all, we’re a bit ambivalent about Service Stream’s performance. Even though it seems to keep most of its profits, given the low ROE, investors may not be benefiting from all that reinvestment after all. Weak earnings growth suggests our theory is correct. That said, the latest forecasts from industry analysts show that the company’s earnings are set to accelerate. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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