With its stock down 20% over the past three months, it is easy to disregard PNC Process Systems (SHSE:603690). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study PNC Process Systems' ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for PNC Process Systems is:

6.2% = CN¥315m ÷ CN¥5.1b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.06.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of PNC Process Systems' Earnings Growth And 6.2% ROE

On the face of it, PNC Process Systems' ROE is not much to talk about. However, its ROE is similar to the industry average of 6.9%, so we won't completely dismiss the company. Moreover, we are quite pleased to see that PNC Process Systems' net income grew significantly at a rate of 27% over the last five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that PNC Process Systems' growth is quite high when compared to the industry average growth of 9.5% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about PNC Process Systems''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is PNC Process Systems Using Its Retained Earnings Effectively?

PNC Process Systems has a really low three-year median payout ratio of 13%, meaning that it has the remaining 87% left over to reinvest into its business. So it looks like PNC Process Systems is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, PNC Process Systems has been paying dividends over a period of seven years. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we feel that PNC Process Systems certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com