Luminex (NASDAQ: LMNX) has seen good progress in the equity market with a stock up 13% in the past three months. However, we have decided to pay particular attention to the weakness of its financials as we doubt that the current momentum will continue, given the scenario. Specifically, we have decided to study the ROE of Luminex in this article.
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. Simply put, it is used to assess a company’s profitability against its equity.
See our latest review for Luminex
How do you calculate return on equity?
the return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE of Luminex is:
4.8% = $ 24 million ÷ $ 488 million (based on the last twelve months up to March 2021).
“Return” refers to a company’s profits over the past year. One way to conceptualize this is that for every dollar of shareholder capital it has, the company has made a profit of $ 0.05.
What is the relationship between ROE and profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. Based on how much of that profit the company reinvests or “withholds”, and how effectively it does so, we are then able to assess a company’s profit growth potential. Generally speaking, all other things being equal, companies with a high return on equity and profit retention have a higher growth rate than companies that do not share these attributes.
Luminex profit growth and ROE of 4.8%
When you first look at it, Luminex’s ROE doesn’t look so appealing. Another quick study shows that the company’s ROE also doesn’t compare to the industry average of 18%. Therefore, it might not be wrong to say that Luminex’s 28% five-year drop in net income was likely the result of lower ROE. However, other factors could also cause lower income. Such as – low income retention or poor allocation of capital.
That being said, we compared Luminex’s performance to that of the industry and became concerned when we found that while the company had cut profits, the industry had increased profits at a rate of 20%. % during the same period.
Profit growth is an important factor in the valuation of stocks. The investor should try to determine whether the expected growth or decline in earnings, whatever the case, is taken into account. In doing so, he will have an idea if the title is heading for clear blue waters or marshy waters ahead. Is Luminex valued fairly compared to other companies? These 3 evaluation measures could help you make a decision.
Is Luminex Using Its Profits Effectively?
Luminex’s decline in earnings is not surprising given how the company spends most of its profits on dividends, judging by its three-year median payout ratio of 58% (or a retention rate of 42%). With very little left to reinvest in the business, earnings growth is far from likely. You can see the 3 risks we have identified for Luminex by visiting our risk dashboard for free on our platform here.
Additionally, Luminex has been paying dividends for four years, which is a considerable amount of time, suggesting that management must have perceived that shareholders prefer consistent dividends even though earnings have declined.
Overall, Luminex’s performance is quite disappointing. Due to its low ROE and lack of reinvestment in the business, the company has experienced a disappointing rate of earnings growth. That said, we have studied the latest analysts’ forecasts and found that while the company has cut profits in the past, analysts expect its profits to rise in the future. Are these analyst expectations based on general industry expectations or on company fundamentals? Click here to go to our business analyst’s forecast page.
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