With its stock down 16% over the past three months, it is easy to disregard GFT Technologies (ETR:GFT). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to GFT Technologies’ 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for GFT Technologies
How Is ROE Calculated?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for GFT Technologies is:
22% = €47m ÷ €215m (Based on the trailing twelve months to June 2023).
The ‘return’ is the yearly profit. That means that for every €1 worth of shareholders’ equity, the company generated €0.22 in profit.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. 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.
GFT Technologies’ Earnings Growth And 22% ROE
Firstly, we acknowledge that GFT Technologies has a significantly high ROE. Secondly, even when compared to the industry average of 11% the company’s ROE is quite impressive. As a result, GFT Technologies’ exceptional 28% net income growth seen over the past five years, doesn’t come as a surprise.
As a next step, we compared GFT Technologies’ net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 16%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is GFT fairly valued? This infographic on the company’s intrinsic value has everything you need to know.
Is GFT Technologies Using Its Retained Earnings Effectively?
GFT Technologies’ three-year median payout ratio is a pretty moderate 27%, meaning the company retains 73% of its income. By the looks of it, the dividend is well covered and GFT Technologies is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
Besides, GFT Technologies has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts’ consensus data, we found that the company is expected to keep paying out approximately 29% of its profits over the next three years. Accordingly, forecasts suggest that GFT Technologies’ future ROE will be 23% which is again, similar to the current ROE.
Conclusion
In total, we are pretty happy with GFT Technologies’ performance. In particular, it’s great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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.