SolTech Energy Sweden AB (publ) (STO: SOLT) Goes strong but the basics seem to be mixed: Is there a clear direction for the share?
Most readers would already be aware that SolTech Energy Sweden’s (STO: SOLT) share increased significantly by 32% in the past month. However, we decided to pay attention to the company’s foundations, which do not seem to give a clear indication of the company’s financial health. In this article, we decided to focus on SolTech Energy Sweden’s ROE.
Return on equity or ROE is a key measure used to assess how effectively a company’s management uses the company’s capital. In other words, it is a profitability ratio that measures the return on capital provided by the company’s shareholders.
See our latest analysis for SolTech Energy Sweden
How do you calculate return on equity?
The formula for ROE are:
Return on equity = Net profit (from continuing operations) ÷ Equity
So, based on the above formula, ROE for SolTech Energy Sweden is:
8.3% = SEK 78 million ÷ SEK 939 million (Based on the last twelve months to December 2021).
The “return” is the annual profit. One way to conceptualize this is that the company made SEK 0.08 in profit for every SEK 1 of the shareholders’ capital it has.
What is the relationship between ROE and profit growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we can then assess a company’s profit growth potential. In general, all things being equal, companies with high returns on equity and profit margins have a higher growth rate than companies that do not share these characteristics.
SolTech Energy Sweden’s earnings growth and 8.3% ROE
When you first look at it, SolTech Energy Sweden’s ROE does not look so attractive. A quick further study shows that the company’s ROE is also not compared with the industry average of 11%. Therefore, it is perhaps not wrong to say that the five-year net income decline of 22% that SolTech Energy Sweden saw was probably the result of having a lower ROE. We believe that there may also be other factors that come into play here. Such as – low profit or poor capital allocation.
As I said, we compared SolTech Energy Sweden’s results with the industry and were worried when we discovered that while the company has shrunk its profits, the industry has increased its profits by 14% during the same period.
Profit growth is an important measure to keep in mind when valuing a share. What investors need to decide next is whether the expected profit growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is positioned for a bright or gloomy future. Is SolTech Energy Sweden fairly valued compared to other companies? These three valuation measures can help you decide.
Is SolTech Energy Sweden effectively reinvesting its profits?
Since SolTech Energy Sweden does not pay dividends, we conclude that they keep all their profits, which is quite puzzling when you consider the fact that there is no profit growth to show for it. It seems that there may be other reasons to explain the shortcoming in that regard. For example, the business may be in decline.
Summary
On the whole, we feel that the performance that SolTech Energy Sweden shows can be open to many interpretations. Although the company has a high profit margin, its low return is likely to hamper its profit growth. In conclusion, we would proceed cautiously with this company and one way to do that would be to look at the business risk profile. You can see the 3 risks we have identified for SolTech Energy Sweden by visiting our instrument panel for risks free on our platform here.
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This article by Simply Wall St is general in nature. We provide comments based on historical data and analyst forecasts only using an impartial method and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any shares and does not take into account your goals or your financial situation. We strive to provide you with long-term focused analysis driven by basic data. Please note that our analysis may not take into account the latest price sensitive company announcements or qualitative material. Simply Wall St has no position in any of the shares mentioned.