Are Robust Financials Driving the Recent Rally in Liquidity Services, Inc. (NASDAQ:LQDT) Stock?

Liquidity Services (NASDAQ:LQDT) stock is up a remarkable 46% over the past three months. Given that the market rewards strong financials over the long term, we wonder if that is the case in this case. 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 assesses the profitability of a company in relation to its equity capital.

Check out our latest analysis for Liquidity Services

The Formula for ROE Is:

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. This means that for every $1 of equity, the company made $0.11 in profit.

So far we have 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 of ​​the company’s growth potential. In general, companies with a high return on equity and profit retention, other things being equal, have a higher growth rate than companies that do not have these characteristics.

First of all, Liquidity Services’ ROE looks acceptable. And when comparing with the industry, we found that the average industry ROE is similar at 12%. This certainly adds some context to Liquidity Services’ exceptional net income growth of 31% 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.

We then compared Liquidity Services’ net income growth with that of the industry and are pleased to see that the company’s growth number is higher compared to the industry, which has a growth rate of 11% over the same five-year period.

The basis for a company’s valuation depends to a large extent on earnings growth. The investor should try to find out whether the expected growth or decline in earnings (as the case may be) is priced in. This then helps him determine whether the stock is suitable for a bright or bleak future. 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.

The story continues