Are Eckoh plc's (LON:ECK) Mixed Financials The Reason For Its Gloomy Performance on The Stock Market?

Simply Wall St
·4 min read

With its stock down 2.4% over the past week, it is easy to disregard Eckoh (LON:ECK). It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. In this article, we decided to focus on Eckoh's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Eckoh

How Do You Calculate Return On Equity?

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 Eckoh is:

4.0% = UK£1.6m ÷ UK£40m (Based on the trailing twelve months to March 2022).

The 'return' is the yearly profit. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.04 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Eckoh's Earnings Growth And 4.0% ROE

At first glance, Eckoh's ROE doesn't look very promising. Next, when compared to the average industry ROE of 8.0%, the company's ROE leaves us feeling even less enthusiastic. Although, we can see that Eckoh saw a modest net income growth of 13% over the past five years. We reckon that there could be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Eckoh's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 26% in the same period.

past-earnings-growth
past-earnings-growth

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for ECK? You can find out in our latest intrinsic value infographic research report.

Is Eckoh Making Efficient Use Of Its Profits?

Eckoh has a significant three-year median payout ratio of 58%, meaning that it is left with only 42% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Besides, Eckoh has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 44% over the next three years.

Conclusion

Overall, we have mixed feelings about Eckoh. Although the company has shown a fair bit of growth in earnings, the reinvestment rate is low. Meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits and reinvesting that at a higher rate of return. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Eckoh and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here

  • Up next
  • Up next
  • Up next
  • Up next

Latest Stories

  • Duke of Edinburgh leads commemoration of Australia and New Zealand’s war dead

    Edward paid his respects to the Antipodean fallen on behalf of the nation.

  • Q1 2024 Align Technology Inc Earnings Call

    Q1 2024 Align Technology Inc Earnings Call

  • EU military officer says a frigate has destroyed a drone launched from Yemen's Houthi-held areas

    NICOSIA, Cyprus (AP) — A top European Union military officer said that a frigate that’s part of an EU miliary mission in the Red Sea to protect merchant shipping destroyed a drone launched from an area in Yemen controlled by Houthi rebels on Thursday morning. Austrian Gen. Robert Brieger, who is chair of the EU’s military committee, said that it would be crucial for the bloc to “conserve resources” over the long haul because the threat posed by Houthi attacks “will not disappear” due to its conn

  • FTSE 100 Live 25 April: Index surges on £31bn mining takeover move and blue-chip updates

    A £31 billion takeover pursuit and some robust blue-chip updates helped to boost the FTSE 100 index today. Anglo American, whose interests include De Beers and the giant Woodsmith polyhalite project in North Yorkshire, is the target of Australia’s BHP. Meanwhile, shares in Barclays, AstraZeneca and Unilever performed strongly after their first quarter updates.

  • SNP's power-sharing deal with the Scottish Greens collapses

    It follows the government's decision to scrap key climate targets and its response to a review into gender services.

  • EU should set 600 billion euro target for capital markets union-France

    The European Union should set a target to raise 600 billion euros ($644 billion) in investments annually by the end of the decade by integrating its fragmented capital markets, French Finance Minister Bruno Le Maire said on Thursday. Although Europeans generally save more than Americans, EU capital markets currently lack the depth of their U.S. counterparts because they largely operate along national lines. All EU leaders gave support to the principle of capital markets union at a summit this month though divisions remain on the details, with some countries reluctant to cede control of national financial rules.

  • House speaker Mike Johnson heckled by protesters in tense campus visit

    While the Speaker visited Columbia, police confronted pro-Palestinian protesters at campuses in Texas and California.

  • Shoplifting hits record high with more than 1,000 offences a day

    Shoplifting has hit a record high of nearly 1,200 offences a day - but the number of cases solved has fallen to a low of just one in 10.

  • Dow Jones Futures Fall As Meta Dives On Guidance; Chipotle Eyes Buy Point

    The rally attempt paused Wednesday as Nvidia reversed lower. Meta, Chipotle and ServiceNow led key earnings late.

  • Q1 2024 Biomarin Pharmaceutical Inc Earnings Call

    Q1 2024 Biomarin Pharmaceutical Inc Earnings Call

  • Fourth person arrested after five migrants die in Channel boat crossing tragedy

    An 18-year-old from Sudan was arrested at Manston migrant processing centre in Kent on Wednesday evening.

  • Russian rouble hits three-week high on eve of rate decision

    The Russian rouble hit a three-week high against the dollar on Thursday, a day before the central bank is widely expected to hold interest rates at 16% for its third meeting in a row. At 1039 GMT the rouble was up 0.1% against the dollar at 92.11 for its strongest since April 3. All 26 analysts polled by Reuters this week expect the Bank of Russia to keep interest rates unchanged on Friday, with inflation's only gradual slowdown preventing the central bank from easing borrowing costs more quickly.

  • Here are the transportation options for the 2024 NFL Draft

    The 2024 NFL Draft is set to bring hundreds of thousands of people into Downtown Detroit for the three-day event on April 25-27, and that means lot of vehicular traffic.

  • Q&A: Labour’s plan for rail reform and the background to nationalisation

    Labour has pledged to nationalise the rail network, claiming it has become a ‘symbol of national decline’.

  • Kim Petras cancels gigs on doctor's orders

    The I Don't Want It At All singer took to social media to announce that she is cancelling her scheduled festival performances this summer. "My buns, I'm devastated to be writing this but I'm going through some health issues and under medical advice I have had to make the hard decision to not perform at festivals this summer," Petras shared. She did not provide details on exactly what health issues she is experiencing. "I love u so much and I'll make it up to you and be back better than ever very soon," she signed off.

  • Green fleet transition faces financial roadblock

    The cost of replacing 41 diesel waste vehicles with electric or hydrogen models proving prohibitive.

  • UPDATE 1-Caterpillar profit rises as higher prices offset easing demand

    Caterpillar posted a rise in quarterly profit on Thursday as it held on to higher prices for its construction equipment as demand eased from last year's boom. Caterpillar has benefited from President Joe Biden's $1 trillion 2021 infrastructure law to upgrade roads, bridges and other transportation infrastructure. Although the boom from last year has eased it has remained relatively stable, helping Caterpillar hold on to the price increases it launched in the second half of 2023.

  • Vauxhall maker threatens to quit UK market over electric car mandate

    The net zero crackdown on combustion engines could force the maker of Vauxhall to pull out of Britain, its boss has warned.

  • Here’s Why HCI Group (HCI) Rose in Q1

    Bernzott Capital Advisors, an investment management firm, published its “US Small Cap Value Fund” first-quarter 2024 investor letter. A copy of the same can be downloaded here. In the first quarter, the portfolio gained +8.5% on a net basis, well above R2000V’s advance of +2.9% and above R2500V’s rise of +6.1%. The largest contribution to the […]

  • Belarus says it thwarted attack on capital by drones launched from Lithuania

    The head of the Belarusian security service said on Thursday it had thwarted an attack on the capital Minsk by drones launched from Lithuania, Russian state news agencies said. There was no immediate comment from NATO-member Lithuania. "The State Security Committee, in cooperation with colleagues from other law enforcement agencies, has recently carried out a number of acute security measures, which made it possible to prevent strikes by combat drones from the territory of Lithuania on objects in Minsk and its suburbs," RIA news agency quoted Belarusian security chief Ivan Tertel as saying.