Neo Performance Materials Inc. (TSE: NEO) shares are soaring but financial data looks inconsistent: will the uptrend continue?

Most readers already know that the share of Neo Performance Materials (TSE: NEO) has risen significantly by 17% in the past three months. However, we have decided to pay attention to the fundamentals of the company which do not seem to give a clear sign on the financial health of the company. More precisely, we decided to study the ROE of Neo Performance Materials in this article.

Return on equity or ROE is an important factor for a shareholder to consider, as it tells them how effectively their capital is being reinvested. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

Check out our latest review for Neo Performance Materials

How to calculate return on equity?

Return on equity can be calculated using the formula:

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

Thus, based on the above formula, the ROE of Neo Performance Materials is:

8.1% = US $ 31 million ÷ US $ 384 million (based on the last twelve months to September 2021).

The “return” is the profit of the last twelve months. This means that for every C $ 1 of having shareholders, the company generated C $ 0.08 in profit.

Why is ROE important for profit growth?

So far, we’ve learned that ROE measures how efficiently a business generates profits. Based 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 everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.

A side-by-side comparison of Neo Performance Materials’ 8.1% profit growth and ROE

At first glance, the ROE of Neo Performance Materials does not look very promising. We then compared the company’s ROE to that of the industry as a whole and were disappointed to find that the ROE is 11% below the industry average. For this reason, Neo Performance Materials’ drop in net profit of 24% over five years is not surprising given its lower ROE. We believe there could also be other aspects that negatively influence the company’s earnings outlook. Such as – low profit retention or misallocation of capital.

However, when we compared the growth of Neo Performance Materials with that of the industry, we found that while the company’s profits declined, the industry saw profit growth of 14% over the same period. period. It is quite worrying.

TSX: NEO Past Earnings Growth December 20, 2021

Profit growth is an important metric to consider when valuing a stock. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are waiting for them. If you’re wondering about the valuation of Neo Performance Materials, check out this gauge of its price / earnings ratio, relative to its industry.

Is Neo Performance Materials Efficiently Using Its Retained Earnings?

Despite a normal three-year median payout ratio of 27% (where it retains 73% of its profits), Neo Performance Materials experienced a decline in its profits as we saw above. So there could be other factors at play here that could potentially hamper growth. For example, the company faced headwinds.

Additionally, Neo Performance Materials paid dividends over a four-year period, suggesting that sustaining dividend payments is preferred by management even when earnings are declining. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 30%. Either way, Neo Performance Materials’ future ROE is expected to reach 10%, although there isn’t much expected change in its payout ratio.

Summary

Overall, we believe that the performance shown by Neo Performance Materials can be open to many interpretations. Although the company has a high reinvestment rate, the low ROE means that all that reinvestment is not benefiting its investors and, moreover, it has a negative impact on profit growth. That said, looking at current analysts’ estimates, we found that the company’s earnings growth rate is expected to see a huge improvement. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.


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