Profit companies

Is there a clear direction for the stock?

Most readers already know that Kinaxis (TSE:KXS) stock is up 2.6% over the past week. Given that stock prices generally follow long-term trading performance, we wonder if the company’s mixed financials could have a negative effect on its current price movement. In this article, we decided to focus on Kinaxis ROE.

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.

See our latest analysis for Kinaxis

How is ROE calculated?

The ROE formula is:

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

So, based on the above formula, the ROE for Kinaxis is:

3.7% = US$13 million ÷ US$346 million (based on trailing 12 months to March 2022).

“Yield” is the income the business has earned over the past year. This means that for every Canadian dollar of equity, the company generated a profit of 0.04 Canadian dollars.

Why is ROE important for earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.

A side-by-side comparison of Kinaxis earnings growth and ROE of 3.7%

When you first look at it, Kinaxis’ ROE doesn’t look that appealing. We then compared the company’s ROE to the entire industry and were disappointed to see that the ROE is below the industry average of 10%. Under the circumstances, the significant decline in net income of 14% seen by Kinaxis over the past five years is not surprising. We believe there could be other factors at play here as well. For example, it is possible that the company has misallocated capital or that the company has a very high payout ratio.

So, as a next step, we benchmarked Kinaxis’ performance against the industry and were disappointed to find that while the company was cutting earnings, the industry was increasing earnings at a rate of 9.5 % over the same period.

past earnings-growth

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. Is KXS valued enough? This intrinsic business value infographic has everything you need to know.

Does Kinaxis use its profits efficiently?

Since Kinaxis pays no dividends, we infer that it keeps all of its earnings, which is rather confusing considering there is no earnings growth to show. So there could be other explanations for this. For example, the company’s business may deteriorate.

Conclusion

Overall, we have mixed feelings about Kinaxis. Although the company has a high reinvestment rate, the low ROE means that all this reinvestment does not benefit its investors and, moreover, it has a negative impact on earnings growth. That said, we studied the latest analyst forecasts and found that while the company has cut earnings in the past, analysts expect earnings to increase in the future. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.