Is K3 Capital Group PLC's (LON:K3C) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?
K3 Capital Group's (LON:K3C) stock is up by a considerable 22% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on K3 Capital Group'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. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for K3 Capital 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 K3 Capital Group is:
10.0% = UK£4.7m ÷ UK£47m (Based on the trailing twelve months to November 2020).
The 'return' is the income the business earned over the last year. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.10.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
K3 Capital Group's Earnings Growth And 10.0% ROE
To begin with, K3 Capital Group seems to have a respectable ROE. Even when compared to the industry average of 11% the company's ROE looks quite decent. This certainly adds some context to K3 Capital Group's moderate 10% net income growth seen over the past five years.
We then performed a comparison between K3 Capital Group's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 10% 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. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for K3C? You can find out in our latest intrinsic value infographic research report.
Is K3 Capital Group Efficiently Re-investing Its Profits?
The high three-year median payout ratio of 80% (or a retention ratio of 20%) for K3 Capital Group suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Moreover, K3 Capital Group is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 75% of its profits over the next three years. However, K3 Capital Group's ROE is predicted to rise to 29% despite there being no anticipated change in its payout ratio.
Summary
Overall, we are quite pleased with K3 Capital Group's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. 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.
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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