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EKF Diagnostics Holdings plc (LON:EKF) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

Simply Wall St · 08/28 05:04

Most readers would already be aware that EKF Diagnostics Holdings' (LON:EKF) stock increased significantly by 17% over the past three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Specifically, we decided to study EKF Diagnostics Holdings' ROE in this article.

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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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How To Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for EKF Diagnostics Holdings is:

9.0% = UK£6.6m ÷ UK£73m (Based on the trailing twelve months to December 2024).

The 'return' is the income the business earned over the last year. That means that for every £1 worth of shareholders' equity, the company generated £0.09 in profit.

View our latest analysis for EKF Diagnostics Holdings

What Has ROE Got To Do With 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.

EKF Diagnostics Holdings' Earnings Growth And 9.0% ROE

At first glance, EKF Diagnostics Holdings' ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 8.9%, we may spare it some thought. But then again, EKF Diagnostics Holdings' five year net income shrunk at a rate of 26%. Bear in mind, the company does have a slightly low ROE. Hence, this goes some way in explaining the shrinking earnings.

That being said, we compared EKF Diagnostics Holdings' 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 12% in the same 5-year period.

past-earnings-growth
AIM:EKF Past Earnings Growth August 28th 2025

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is EKF fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is EKF Diagnostics Holdings Using Its Retained Earnings Effectively?

While the company did payout a portion of its dividend in the past, it currently doesn't pay a regular dividend. This implies that potentially all of its profits are being reinvested in the business.

Conclusion

Overall, we have mixed feelings about EKF Diagnostics Holdings. 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. To know the 1 risk we have identified for EKF Diagnostics Holdings visit our risks dashboard for free.