Payton Planar Magnetics Ltd.'s (EBR:PAY) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

Payton Planar Magnetics (EBR:PAY) has had a rough three months with its share price down 24%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Payton Planar Magnetics' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Payton Planar Magnetics

How Do You Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Payton Planar Magnetics is:

17% = US$8.8m ÷ US$51m (Based on the trailing twelve months to December 2019).

The 'return' is the yearly profit. That means that for every €1 worth of shareholders' equity, the company generated €0.17 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learnt that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Payton Planar Magnetics' Earnings Growth And 17% ROE

To begin with, Payton Planar Magnetics seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 11%. This certainly adds some context to Payton Planar Magnetics' exceptional 32% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Payton Planar Magnetics' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 11% in the same period.

ENXTBR:PAY Past Earnings Growth April 24th 2020
ENXTBR:PAY Past Earnings Growth April 24th 2020

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Payton Planar Magnetics fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Payton Planar Magnetics Using Its Retained Earnings Effectively?

Payton Planar Magnetics' significant three-year median payout ratio of 56% (where it is retaining only 44% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.

Besides, Payton Planar Magnetics has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

In total, we are pretty happy with Payton Planar Magnetics' performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Payton Planar Magnetics' past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

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