Bonso Electronics International (NASDAQ: BNSO) stock has risen 22% in the past three months. However, we have decided to pay attention to the fundamentals of the company which do not seem to give a clear sign on the financial health of the company. In this article, we have decided to focus on the ROE of Bonso Electronics International.

Return on equity or ROE is an important factor for a shareholder to consider because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio that measures the rate of return on capital contributed by shareholders to the company.

Check out our latest analysis for Bonso Electronics International

How to calculate return on equity?

the return on equity formula is:

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

Thus, based on the above formula, the ROE of Bonso Electronics International is:

7.5% = US $ 1.2M ÷ US $ 16M (based on the last twelve months up to September 2020).

The “return” is the amount earned after tax over the past twelve months. One way to conceptualize this is that for every dollar of shareholder capital it has, the company has made a profit of $ 0.08.

What is the relationship between ROE and profit growth?

We have already established that ROE serves as an effective gauge to generate profit for the future profits of a business. We now need to assess how much profit the business is reinvesting or “withholding” for future growth, which then gives us an idea of ​​the growth potential of the business. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.

7.5% profit growth and ROE of Bonso Electronics International

At first glance, Bonso Electronics International’s ROE isn’t much to say. We then compared the company’s ROE to that of the industry as a whole and were disappointed to see that the ROE is 11% below the industry average. Therefore, it may not be wrong to say that the 49% drop in five-year net income seen by Bonso Electronics International was likely the result of a lower return on investment. However, other factors could also cause lower income. Such as – low income retention or poor allocation of capital.

That being said, we compared the performance of Bonso Electronics International to that of the industry and we were concerned when we found that even though the company had reduced its profits, the industry had increased its profits at a rate of. 11% over the same period.

NasdaqCM: Growth in past profits of the BNSO as of May 31, 2021

Profit growth is an important metric to consider when valuing a stock. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are ahead of them. If you are wondering about the valuation of Bonso Electronics International, check out this indicator of its price / earnings ratio, relative to its industry.

Is Bonso Electronics International Using Profits Efficiently?

Conclusion

Overall, we have mixed feelings about Bonso Electronics International. Although the company has a high reinvestment rate, the low ROE means that all that reinvestment does not yield any benefit to its investors, and moreover, it has a negative impact on profit growth. In conclusion, we would proceed cautiously with this company and one way to do that would be to look at the risk profile of the company. To learn about the 4 risks we have identified for Bonso Electronics International, visit our risk dashboard for free.

Promoted
If you decide to trade in Bonso Electronics International, use the cheapest platform * rated # 1 overall by Barron’s, Interactive brokers. Trade stocks, options, futures, currencies, bonds and funds in 135 markets, all from one integrated account.

This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in any of the stocks mentioned.
*Interactive Brokers Ranked Least Expensive Broker By StockBrokers.com Annual Online Review 2020

Do you have any comments on this article? Concerned about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.



Source link