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Zaptec AS (OB:ZAP) financials are too murky to relate to current stock price dynamics: What does the stock hold?

Zaptec Inc (OB:ZAP) has had a strong run in the stock market with a significant 12% rise in its stock over the past week. However, we decided to pay attention to the fundamentals of the company which do not seem to give a clear indication of the financial health of the company. In this article, we decided to focus on Zaptec’s ROE.

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In simple terms, it is used to assess the profitability of a company in relation to its equity.

Check out our latest analysis for Zaptec

How do you calculate return on equity?

The ROE formula is:

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

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

2.1% = 7.6 million kr ÷ 367 million kr (based on the last twelve months to March 2022).

“Yield” refers to a company’s earnings over the past year. This means that for every NOK 1 worth of equity, the company has generated NOK 0.02 of profit.

Why is ROE important for earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. Depending 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 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 Zaptec’s earnings growth and ROE of 2.1%

It’s hard to say that Zaptec’s ROE is very good on its own. Not only that, even compared to the industry average of 13%, the company’s ROE is quite unremarkable. Therefore, it may not be wrong to say that the 41% decline in net income over five years that Zaptec saw was possibly the result of lower ROE. We believe there could be other factors at play here as well. For example, the company has misallocated capital or the company has a very high payout ratio.

However, when we compared Zaptec’s growth with the industry, we found that while the company’s earnings declined, the industry saw earnings growth of 11% over the same period. It’s quite worrying.

OB:ZAP Past Earnings Growth June 3, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This then helps them determine if the stock is positioned for a bright or bleak future. A good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check if Zaptec is trading on a high P/E or a low P/E, relative to its industry.

Does Zaptec effectively reinvest its profits?

Because Zaptec pays no dividends, we infer that it keeps all of its earnings, which is rather confusing considering that 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 Zaptec. Although the company has a high earnings retention rate, its low rate of return is likely hampering its 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.

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.