Liquidity Services, Inc. (NASDAQ:LQDT) Stock Is Performing Well: Is the Market Following Fundamentals?

Most readers are already aware that Liquidity Services (NASDAQ:LQDT) stock has risen significantly by 54% over the past three months. Since the market typically pays for a company’s long-term fundamentals, we decided to examine the company’s key performance indicators to see if they could influence the market. In this article, we decided to focus on Liquidity Services’ ROE.

Return on equity or ROE is an important metric used to assess how efficiently management is using the company’s capital. In simple terms, it measures the profitability of a company in relation to its equity capital.

Check out our latest analysis for Liquidity Services

How do you calculate return on equity?

ROE can be calculated using the formula:

Return on equity = net profit (from continuing operations) ÷ equity

So, based on the above formula, the ROE for Liquidity Services is:

11% = $20M ÷ $183M (Based on trailing twelve months ending September 2024).

The “return” is the annual profit. Another way to think of it is that for every dollar of equity, the company was able to generate a profit of $0.11.

What is the relationship between ROE and earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. Based on how much of its profits the company reinvests or “retains”, we can then evaluate a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher a company’s growth rate will be compared to companies that don’t necessarily share these characteristics.

Liquidity Services earnings growth and 11% ROE

First of all, Liquidity Services appears to have a respectable ROE. And when comparing with the industry, we found that the average industry ROE is similar at 12%. This may have laid the foundation for the impressive 31% net income growth recorded by Liquidity Services over the last five years. We believe there could be other aspects that have a positive impact on the company’s earnings growth. For example, it is possible that management has made some good strategic decisions or that the company has a low payout ratio.

As a next step, we compared Liquidity Services’ net income growth to that of the industry and, encouragingly, we found that the company’s growth is higher than the average industry growth of 11%.

Earnings growth is an important metric to consider when valuing a stock. It is important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This allows them to determine whether the stock’s future looks promising or threatening. If you’re wondering about Liquidity Services’ valuation, take a look at this measure of the company’s price-to-earnings ratio compared to the industry.

Does Liquidity Services use its profits efficiently?

Since Liquidity Services does not pay regular dividends to its shareholders, we conclude that the company has reinvested all of its profits to grow its business.

Diploma

Overall, we are quite satisfied with the performance of Liquidity Services. We particularly like that the company reinvests heavily in its business, with a high return. Unsurprisingly, this has led to impressive earnings growth. If the company continues to grow its earnings at the rate it has been doing, it could have a positive impact on the share price, as earnings per share influence long-term share prices. Remember that the price of a stock also depends on the perceived risk. Therefore, investors need to understand the risks involved before investing in a company. You can see the 1 risk we have identified for Liquidity Services by visiting our Risk dashboard free on our platform here.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any stocks mentioned.