Does The Market Have A Low Tolerance For Signature Aviation plc's (LON:SIG) Mixed Fundamentals?
It is hard to get excited after looking at Signature Aviation's (LON:SIG) recent performance, when its stock has declined 40% over the past three months. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. In this article, we decided to focus on Signature Aviation's 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Signature Aviation
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 Signature Aviation is:
2.6% = US$41m ÷ US$1.6b (Based on the trailing twelve months to December 2019).
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 £0.03 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Signature Aviation's Earnings Growth And 2.6% ROE
When you first look at it, Signature Aviation's ROE doesn't look that attractive. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 9.0%. Hence, the flat earnings seen by Signature Aviation over the past five years could probably be the result of it having a lower ROE.
Next, on comparing Signature Aviation's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 1.6% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is SIG fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Signature Aviation Efficiently Re-investing Its Profits?
With a high three-year median payout ratio of 79% (implying that the company keeps only 21% of its income) of its business to reinvest into its business), most of Signature Aviation's profits are being paid to shareholders, which explains the absence of growth in earnings.
Moreover, Signature Aviation has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 80%. Regardless, the future ROE for Signature Aviation is predicted to rise to 9.4% despite there being not much change expected in its payout ratio.
Conclusion
On the whole, we feel that the performance shown by Signature Aviation can be open to many interpretations. While no doubt its earnings growth is pretty respectable, the low profit retention could mean that the company's earnings growth could have been higher, had it been paying reinvesting a higher portion of its profits. An improvement in its ROE could also help future earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
