Do Its Financials Have Any Role To Play In Driving Mr Price Group Limited's (JSE:MRP) Stock Up Recently?
Mr Price Group's (JSE:MRP) stock is up by a considerable 20% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Mr Price Group's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for Mr Price Group
How Is ROE Calculated?
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 Mr Price Group is:
22% = R3.1b ÷ R14b (Based on the trailing twelve months to September 2023).
The 'return' is the profit over the last twelve months. That means that for every ZAR1 worth of shareholders' equity, the company generated ZAR0.22 in profit.
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. 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.
Mr Price Group's Earnings Growth And 22% ROE
To start with, Mr Price Group's ROE looks acceptable. Further, the company's ROE is similar to the industry average of 19%. Mr Price Group's decent returns aren't reflected in Mr Price Group'smediocre five year net income growth average of 3.2%. We reckon that a low growth, when returns are moderate could be the result of certain circumstances like low earnings retention or poor allocation of capital.
As a next step, we compared Mr Price Group's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 11% in the same period.
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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Mr Price Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Mr Price Group Efficiently Re-investing Its Profits?
With a high three-year median payout ratio of 63% (or a retention ratio of 37%), most of Mr Price Group's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.
In addition, Mr Price Group 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 64%. Accordingly, forecasts suggest that Mr Price Group's future ROE will be 24% which is again, similar to the current ROE.
Conclusion
Overall, we feel that Mr Price Group certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.
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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.
