U.S. Markets close in 2 hrs 21 mins
  • S&P 500

    4,291.21
    +11.06 (+0.26%)
     
  • Dow 30

    33,891.97
    +130.92 (+0.39%)
     
  • Nasdaq

    13,102.95
    +55.77 (+0.43%)
     
  • Russell 2000

    2,014.34
    -2.27 (-0.11%)
     
  • Crude Oil

    89.05
    -3.04 (-3.30%)
     
  • Gold

    1,798.20
    -17.30 (-0.95%)
     
  • Silver

    20.28
    -0.41 (-2.00%)
     
  • EUR/USD

    1.0171
    -0.0087 (-0.8442%)
     
  • 10-Yr Bond

    2.7820
    -0.0670 (-2.35%)
     
  • Vix

    19.97
    +0.44 (+2.25%)
     
  • GBP/USD

    1.2074
    -0.0065 (-0.5361%)
     
  • USD/JPY

    133.2260
    -0.2540 (-0.1903%)
     
  • BTC-USD

    24,154.00
    -144.37 (-0.59%)
     
  • CMC Crypto 200

    574.26
    -16.51 (-2.79%)
     
  • FTSE 100

    7,509.15
    +8.26 (+0.11%)
     
  • Nikkei 225

    28,871.78
    +324.80 (+1.14%)
     

Is Kainos Group plc's (LON:KNOS) Latest Stock Performance A Reflection Of Its Financial Health?

  • Oops!
    Something went wrong.
    Please try again later.
·4 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.

Kainos Group's (LON:KNOS) stock is up by a considerable 26% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Kainos Group's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Kainos Group

How Is ROE Calculated?

ROE 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 Kainos Group is:

33% = UK£36m ÷ UK£108m (Based on the trailing twelve months to March 2022).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.33.

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. 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 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 Kainos Group's Earnings Growth And 33% ROE

First thing first, we like that Kainos Group has an impressive ROE. Secondly, even when compared to the industry average of 8.0% the company's ROE is quite impressive. So, the substantial 30% net income growth seen by Kainos Group over the past five years isn't overly surprising.

We then performed a comparison between Kainos Group's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 26% in the same period.

past-earnings-growth
past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. 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 Kainos Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Kainos Group Making Efficient Use Of Its Profits?

Kainos Group has a significant three-year median payout ratio of 63%, meaning the company only retains 37% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Besides, Kainos Group has been paying dividends over a period of seven years. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 59%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 33%.

Conclusion

On the whole, we feel that Kainos Group's performance has been quite good. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here