Is Interlink Electronics, Inc.’s (NASDAQ:LINK) Stock Price Struggling As A Result Of Its Mixed Financials? Leave a comment


It is hard to get excited after looking at Interlink Electronics’ (NASDAQ:LINK) recent performance, when its stock has declined 12% over the past week. It is possible that the markets have ignored the company’s differing financials and decided to lean-in to the negative sentiment. Fundamentals usually dictate market outcomes so it makes sense to study the company’s financials. In this article, we decided to focus on Interlink Electronics’ ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Interlink Electronics

How Is ROE Calculated?

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 Interlink Electronics is:

1.6% = US$138k ÷ US$8.9m (Based on the trailing twelve months to June 2021).

The ‘return’ is the profit over the last twelve months. That means that for every $1 worth of shareholders’ equity, the company generated $0.02 in profit.

What Is The Relationship Between ROE And 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.

Interlink Electronics’ Earnings Growth And 1.6% ROE

It is quite clear that Interlink Electronics’ ROE is rather low. Even when compared to the industry average of 14%, the ROE figure is pretty disappointing. Therefore, it might not be wrong to say that the five year net income decline of 65% seen by Interlink Electronics was possibly a result of it having a lower ROE. We believe that there also might be other aspects that are negatively influencing the company’s earnings prospects. Such as – low earnings retention or poor allocation of capital.

That being said, we compared Interlink Electronics’ performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 13% in the same period.

past-earnings-growth
NasdaqCM:LINK Past Earnings Growth September 24th 2021

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock’s future looks promising or ominous. If you’re wondering about Interlink Electronics”s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Interlink Electronics Efficiently Re-investing Its Profits?

Interlink Electronics doesn’t pay any dividend, meaning that potentially all of its profits are being reinvested in the business, which doesn’t explain why the company’s earnings have shrunk if it is retaining all of its profits. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Summary

On the whole, we feel that the performance shown by Interlink Electronics can be open to many interpretations. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. Our risks dashboard would have the 2 risks we have identified for Interlink Electronics.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only 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 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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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