SOCO (ASX:SOC) has been experiencing a rough patch in the stock market, with a decline of 53% over the past three months. To understand if this trend is likely to continue, it is important to look at the company’s fundamentals, particularly its Return on Equity (ROE).
ROE is a crucial metric that measures how efficiently a company’s management is utilizing its capital. In simple terms, it assesses the profitability of a company in relation to its equity capital. For SOCO, the ROE stands at 4.5%, calculated as AU$350k divided by AU$7.8m for the trailing twelve months to December 2023.
This means that for every A$1 of shareholder’s investment, the company generates a profit of A$0.05. However, when compared to the industry average ROE of 6.4%, SOCO’s performance falls short. This is reflected in the company’s five-year net income decline of 10%.
While the industry has seen an earnings growth of 15% in the same period, SOCO’s earnings have been shrinking. This discrepancy raises concerns about the company’s future prospects and its ability to generate profits. With a high payout ratio of 66%, indicating that most of the profits are being paid to shareholders, SOCO has limited capital for reinvestment, further hindering its growth potential.
In conclusion, SOCO’s performance has been disappointing, with a lack of reinvestment into the business and a low ROE contributing to stagnant earnings growth. Investors may want to delve deeper into the company’s past earnings, revenue, and cash flows to gain a better understanding of its overall performance.
