Is Focusrite plc's (LON:TUNE) Latest Stock Performance A Reflection Of Its Financial Health?
Most readers would already be aware that Focusrite's (LON:TUNE) stock increased significantly by 17% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Focusrite's ROE today.
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.
View our latest analysis for Focusrite
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 Focusrite is:
15% = UK£18m ÷ UK£118m (Based on the trailing twelve months to August 2023).
The 'return' is the yearly profit. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.15 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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.
Focusrite's Earnings Growth And 15% ROE
At first glance, Focusrite seems to have a decent ROE. Especially when compared to the industry average of 10% the company's ROE looks pretty impressive. This probably laid the ground for Focusrite's moderate 19% net income growth seen over the past five years.
When you consider the fact that the industry earnings have shrunk at a rate of 3.6% in the same 5-year period, the company's net income growth is pretty remarkable.
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. This then helps them determine if the stock is placed for a bright or bleak future. Is TUNE fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Focusrite Efficiently Re-investing Its Profits?
Focusrite's three-year median payout ratio to shareholders is 14% (implying that it retains 86% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.
Additionally, Focusrite has paid dividends over a period of nine years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 17% of its profits over the next three years. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 16%.
Summary
Overall, we are quite pleased with Focusrite's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.
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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.
