Liquidity Services, Inc.’s (NASDAQ:LQDT) Stock Is Running Strong: Is the Market Following Fundamentals?

Most readers would already be aware that Liquidity Services’ ( NASDAQ:LQDT ) stock rose a significant 54% over the past three months. Since the market usually pays for a company’s long-term fundamentals, we decided to study 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 a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In simpler terms, it measures the profitability of a business relative to equity.

See 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% = 20 million USD ÷ 183 million USD (Based on last 12 months to September 2024).

The ‘return’ is the annual profit. Another way to think about it is that for every $1 worth of equity, the company was able to earn $0.11 in profit.

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 chooses to reinvest or “retain”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that do not necessarily carry these characteristics.

Liquidity Services’ earnings growth and 11% return on equity

For starters, Liquidity Services appears to have a respectable ROE. And comparing to the industry, we found the average industry ROE to be the same at 12%. Therefore, this likely laid the groundwork for the impressive 31% net income growth that Liquidity Services has seen over the past five years. We believe that there may also be other aspects that have a positive influence on the company’s earnings growth. It is possible, for example, that the company’s management has made some good strategic decisions, or that the company has a low payout percentage.

As a next step, we compared Liquidity Services’ net revenue growth to the industry and pleasingly found that the growth the company is seeing is higher than the industry average 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). Doing so will help them determine whether the stock’s future looks promising or ominous. If you’re wondering about Liquidity Services’ valuation, check out this measurement of its price-to-earnings ratio compared to its industry.

Is Liquidity Services using its profits effectively?

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

Conclusion

Overall, we are quite satisfied with the performance of Liquidity Services. We especially like that the company reinvests heavily in its business and with a high return. Not surprisingly, this has led to impressive earnings growth. If the company continues to grow its earnings as it has, it could have a positive impact on the stock price given how earnings per share share affects long-term share prices. Remember that the price of a stock also depends on the perceived risk. Therefore, investors must keep informed of the risks involved before investing in a company. You can view the 1 risk we have identified for Liquidity Services by visiting our risk dashboard for free on our platform here.

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This article by Simply Wall St is general. We only provide commentary based on historical data and analyst forecasts using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any shares and does not take into account your goals or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not take into account recent price-sensitive company announcements or qualitative material. Simply Wall St has no position in any listed stocks.