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Enero Group (ASX:EGG) has had a great run on the share market with its stock up by a significant 56% over the last three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Enero Group's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.
How Do You Calculate Return On Equity?
Return on equity 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 Enero Group is:
5.1% = AU$6.3m ÷ AU$123m (Based on the trailing twelve months to December 2019).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.05 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.
A Side By Side comparison of Enero Group's Earnings Growth And 5.1% ROE
At first glance, Enero Group's ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 5.4%. Moreover, we are quite pleased to see that Enero Group's net income grew significantly at a rate of 39% over the last five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.
We then performed a comparison between Enero Group's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 36% in the same period.
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. Has the market priced in the future outlook for EGG? You can find out in our latest intrinsic value infographic research report.
Is Enero Group Efficiently Re-investing Its Profits?
Enero Group has a three-year median payout ratio of 40% (where it is retaining 60% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Enero Group is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
Moreover, Enero Group is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 47% of its profits over the next three years. However, Enero Group's ROE is predicted to rise to 12% despite there being no anticipated change in its payout ratio.
On the whole, we do feel that Enero Group has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.
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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