Does the market have low tolerance for Complii FinTech Solutions Ltd’s (ASX:CF1) Mixed Fundamentals?
Complii FinTech Solutions (ASX:CF1) has had a tough three months with its share price down 7.8%. It is possible that the markets have ignored the company’s various financial conditions and decided to lean into the negative sentiment. Fundamentals usually dictate market performance, so it makes sense to study the company’s financials. In particular, we will take into account Complii FinTech Solutions’ ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for Complii FinTech Solutions
How to calculate return on equity?
The formula for return on equity is:
Return on equity = Net profit (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for Complii FinTech Solutions is:
1.0% = AU$115k ÷ AU$11m (Based on the last twelve months to June 2022).
The “return” is the income the business has earned over the past year. Another way to think about it is that for every A$1 worth of equity, the company could earn A$0.01 in profit.
Why is ROE important for earnings growth?
We have already established that ROE serves as an effective profit-generating measure of a company’s future earnings. Depending on how much of these profits the company reinvests or “retains”, and how efficiently it does so, we can then assess a company’s earnings growth potential. Assuming all else remains the same, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that do not necessarily have these characteristics.
Complii FinTech Solutions’ revenue growth and 1.0% yield
As you can see, Complii FinTech Solutions’ ROE looks pretty weak. Not only that, even compared to the industry average of 12%, the company’s ROE is completely unremarkable. Therefore, it might not be wrong to say that the five-year net income decline of 4.0% seen by Complii FinTech Solutions was possibly a result of it having a lower ROE. We believe that there may also be other aspects that negatively affect the company’s earnings prospects. For example, the company has a very high payout ratio, or is facing competitive pressure.
So, as a next step, we compared Complii FinTech Solutions’ performance to the industry and were disappointed to find that while the company has been shrinking earnings, the industry has grown earnings at a rate of 20% over the same period.
Earnings growth is a big factor in share valuation. The investor should try to determine whether the expected growth or decline in earnings, as the case may be, has been priced in. Doing so will help them determine whether the stock’s future looks promising or ominous. If you’re wondering about Complii FinTech Solutions’ valuation, check out this price-to-earnings ratio gauge compared to the industry.
Does Complii FinTech Solutions reinvest its profits effectively?
Complii FinTech Solutions does not pay a dividend, meaning that potentially all of its profits are reinvested in the business, which does not explain why the company’s earnings have shrunk if it retains all of its profits. So there may be other factors at play here that could potentially inhibit growth. For example, the business has faced a number of headwinds.
Conclusion
Overall, we have mixed feelings about Complii FinTech Solutions. While it appears to retain most of its profits, given its low ROE, investors may not benefit from all that reinvestment after all. The low income growth suggests that our theory is correct. Ultimately, we would proceed with caution with this company, and one way to do that would be to look at the risk profile of the business. To know the 2 risks we have identified for Complii FinTech Solutions, visit our risk dashboard for free.
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This article by Simply Wall St is general. We provide commentary based on historical data and analyst forecasts only using an objective methodology, and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares, and does not take into account your goals or your financial situation. We aim to provide you with long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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