Linamar’s (TSE:LNR) stock is up by a considerable 18% over the past three months. But the company’s key financial indicators appear to be differing across the board and that makes us question whether or not the company’s current share price momentum can be maintained. In this article, we decided to focus on Linamar’s ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Linamar is:
4.0% = CA$241m ÷ CA$6.0b (Based on the trailing twelve months to September 2025).
The ‘return’ is the profit over the last twelve months. One way to conceptualize this is that for each CA$1 of shareholders’ capital it has, the company made CA$0.04 in profit.
Check out our latest analysis for Linamar
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.
As you can see, Linamar’s ROE looks pretty weak. Even compared to the average industry ROE of 8.6%, the company’s ROE is quite dismal. Hence, the flat earnings seen by Linamar over the past five years could probably be the result of it having a lower ROE.
Next, on comparing with the industry net income growth, we found that Linamar’s reported growth was lower than the industry growth of 3.2% over the last few years, which is not something we like to see.
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. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for LNR? You can find out in our latest intrinsic value infographic research report.
Linamar’s low three-year median payout ratio of 12%, (meaning the company retains88% of profits) should mean that the company is retaining most of its earnings and consequently, should see higher growth than it has reported.
In addition, Linamar has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.
In total, we’re a bit ambivalent about Linamar’s performance. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. So far, we’ve only made a quick discussion around the company’s earnings growth. To gain further insights into Linamar’s past profit growth, check out this visualization of past earnings, revenue and cash flows.
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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.