Could The Market Be Wrong About Super Retail Group Limited (ASX:SUL) Given Its Attractive Financial Prospects?
It is hard to get excited after looking at Super Retail Group's (ASX:SUL) recent performance, when its stock has declined 6.6% over the past month. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Super Retail Group's ROE today.
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. Put another way, it reveals the company's success at turning shareholder investments into profits.
Check out our latest analysis for Super Retail Group
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Super Retail Group is:
19% = AU$226m ÷ AU$1.2b (Based on the trailing twelve months to December 2020).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.19 in profit.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.
Super Retail Group's Earnings Growth And 19% ROE
To start with, Super Retail Group's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 19%. This certainly adds some context to Super Retail Group's moderate 16% net income growth seen over the past five years.
As a next step, we compared Super Retail Group's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 6.8%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Super Retail Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Super Retail Group Using Its Retained Earnings Effectively?
Super Retail Group has a significant three-year median payout ratio of 71%, meaning that it is left with only 29% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.
Additionally, Super Retail Group has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 67%. Regardless, Super Retail Group's ROE is speculated to decline to 15% despite there being no anticipated change in its payout ratio.
Summary
On the whole, we feel that Super Retail Group's performance has been quite good. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
This article by Simply Wall St is general in nature. 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.
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