LaserBond Limited's (ASX:LBL) Recent Stock Performance Looks Decent- Can Strong Fundamentals Be the Reason?

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Simply Wall St

Thu, Apr 28, 2022, 11:17 PM 3 min read

LaserBond's (ASX:LBL) stock is up by 6.1% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to LaserBond's ROE today.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for LaserBond

How Do You Calculate Return On Equity?

ROE 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 LaserBond is:

13% = AU$3.2m ÷ AU$25m (Based on the trailing twelve months to December 2021).

The 'return' refers to a company's earnings over the last year. That means that for every A$1 worth of shareholders' equity, the company generated A$0.13 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

LaserBond's Earnings Growth And 13% ROE

To start with, LaserBond's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 9.9%. This probably laid the ground for LaserBond's significant 26% net income growth seen over the past five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

Next, on comparing LaserBond's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 26% in the same period.

past-earnings-growth — ASX:LBL Past Earnings Growth April 29th 2022

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for LBL? You can find out in our latest intrinsic value infographic research report.

Is LaserBond Using Its Retained Earnings Effectively?

LaserBond has a three-year median payout ratio of 37% (where it is retaining 63% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and LaserBond is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, LaserBond 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 over the next three years is expected to be approximately 33%. However, LaserBond's ROE is predicted to rise to 21% despite there being no anticipated change in its payout ratio.

Conclusion

Overall, we are quite pleased with LaserBond's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.