It is difficult to get excited after looking at the recent Knowles (NYSE: KN) performance when its shares have decreased by 25% in the last three months. However, we decided to investigate the company’s finances to determine if they had anything to do with the price drop. Shares prices are usually guided by the company’s financial results in the long run, so we decided to pay more attention to the company’s financial results. In particular, today we will pay attention to Roe on Knowles.
The return on equity or ROE is a key measure used to evaluate how effective the company’s management uses the company’s capital. In other words, it is a profitability factor that measures the rate of return on capital provided by the shareholders of the company.
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Thehe Formula for return on equity is:
Return of equity = net profit (from continuing operations) ÷ shareholders’ shareholders
So, based on the above formula, Roe for Knowles is:
3.1% = $ 23 million ÷ $ 756 million (based on the rear twelve months until December 2024).
Return is profit in the last twelve months. So this means that for every 1 dollar of the investment of its shareholders, the company generates a profit of $ 0.03.
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So far, we have learned that ROE measures how effectively a company generates its profits. Now we need to evaluate how much profit the company reinvested or “saved” for future growth, which then gives us an idea of the potential of growth of the company. Assuming that everything else is equal, companies that have both higher return on equity and higher profit retention are usually the ones that have a higher growth rate than companies that do not have the same characteristics.
It is quite clear that Roe on Knowles is quite low. Not only that, even compared to the 10%average, the company’s ROE is completely imperceptible. Given the circumstances, the significant drop in net income by 16%observed by Knowles over the last five years is not surprising. However, there may be other factors that cause profit reduction. For example, the business has allocated the capital poorly or that the company has a very high repayment ratio.
So, as the next step, we compared the Knowles presentation with the industry and we were disappointed when we found that while the company was shrinking its profit, the industry was increasing its profit at 13% in the last few years.