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Do Its Financials Have Any Role To Play In Driving GDI Integrated Facility Services Inc.'s (TSE:GDI) Stock Up Recently?

Most readers would already be aware that GDI Integrated Facility Services' (TSE:GDI) stock increased significantly by 26% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to GDI Integrated Facility Services' 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for GDI Integrated Facility Services

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for GDI Integrated Facility Services is:

7.4% = CA$21m ÷ CA$284m (Based on the trailing twelve months to June 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every CA$1 of its shareholder's investments, the company generates a profit of CA$0.07.

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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

GDI Integrated Facility Services' Earnings Growth And 7.4% ROE

On the face of it, GDI Integrated Facility Services' ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.4%. Particularly, the exceptional 26% net income growth seen by GDI Integrated Facility Services over the past five years is pretty remarkable. 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.

We then performed a comparison between GDI Integrated Facility Services' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 26% in the same period.

past-earnings-growth
past-earnings-growth

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is GDI Integrated Facility Services fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is GDI Integrated Facility Services Efficiently Re-investing Its Profits?

Conclusion

In total, it does look like GDI Integrated Facility Services has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 3 risks we have identified for GDI Integrated Facility Services.

This article by Simply Wall St is general in nature. 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.

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