Is Weakness In Globe International Limited (ASX:GLB) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

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Globe International (ASX:GLB) has had a rough three months with its share price down 15%. 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 Globe International’s ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company’s success at turning shareholder investments into profits.

View our latest analysis for Globe International

How To 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 Globe International is:

32% = AU$17m ÷ AU$55m (Based on the trailing twelve months to December 2020).

The ‘return’ is the yearly profit. That means that for every A$1 worth of shareholders’ equity, the company generated A$0.32 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.

A Side By Side comparison of Globe International’s Earnings Growth And 32% ROE

To begin with, Globe International has a pretty high ROE which is interesting. Additionally, the company’s ROE is higher compared to the industry average of 7.3% which is quite remarkable. As a result, Globe International’s exceptional 20% net income growth seen over the past five years, doesn’t come as a surprise.

Next, on comparing with the industry net income growth, we found that Globe International’s growth is quite high when compared to the industry average growth of 5.3% in the same period, which is great to see.

past-earnings-growth

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. One 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 prospects. So, you may want to check if Globe International is trading on a high P/E or a low P/E, relative to its industry.

Is Globe International Making Efficient Use Of Its Profits?

Globe International’s significant three-year median payout ratio of 60% (where it is retaining only 40% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.

Besides, Globe International has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we are quite pleased with Globe International’s performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that’s not too bad. So far, we’ve only made a quick discussion around the company’s earnings growth. To gain further insights into Globe International’s past profit growth, check out this visualization of past earnings, revenue and cash flows.

This article by Simply Wall St is general in nature. 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.

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