Technology

Detection Technology Oyj Stock Is Strong But Fundamentals Are Uncertain

Detection Technology Oyj (HEL:DETEC) has had a great run on the share market with its stock up by a significant 38% over the last three months. However, we wonder if the company’s inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on Detection Technology Oyj’s ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

See our latest analysis for Detection Technology Oyj

How Is ROE Calculated?

Return on equity 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 Detection Technology Oyj is:

11% = €7.7m ÷ €72m (Based on the trailing twelve months to June 2022).

The ‘return’ refers to a company’s earnings over the last year. One way to conceptualize this is that for each €1 of shareholders’ capital it has, the company made €0.11 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. 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 Detection Technology Oyj’s Earnings Growth And 11% ROE

At first glance, Detection Technology Oyj seems to have a decent ROE. Even so, when compared with the average industry ROE of 17%, we aren’t very excited. Moreover, Detection Technology Oyj’s net income shrunk at a rate of 16%over the past five years. Not to forget, the company does have a high ROE to begin with, just that it is lower than the industry average. Hence there might be some other aspects that are causing earnings to shrink. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

However, when we compared Detection Technology Oyj’s growth with the industry we found that while the company’s earnings have been shrinking, the industry has seen an earnings growth of 7.8% in the same period. This is quite worrisome.

past-earnings-growth
HLSE:DETEC Past Earnings Growth January 25th 2023

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock’s future looks promising or ominous. If you’re wondering about Detection Technology Oyj’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Detection Technology Oyj Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 54% (implying that 46% of the profits are retained), most of Detection Technology Oyj’s profits are being paid to shareholders, which explains the company’s shrinking earnings. The business is only left with a small pool of capital to reinvest – A vicious cycle that doesn’t benefit the company in the long-run. You can see the 2 risks we have identified for Detection Technology Oyj by visiting our risks dashboard for free on our platform here.

Additionally, Detection Technology Oyj has paid dividends over a period of five years, which means that the company’s management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings. Existing analyst estimates suggest that the company’s future payout ratio is expected to drop to 40% over the next three years. The fact that the company’s ROE is expected to rise to 17% over the same period is explained by the drop in the payout ratio.

Summary

Overall, we have mixed feelings about Detection Technology Oyj. On the one hand, the company does have a decent rate of return, however, its earnings growth number is quite disappointing and as discussed earlier, the low retained earnings is hampering the growth. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

Valuation is complex, but we’re helping make it simple.

Find out whether Detection Technology Oyj is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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