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Should Lookers plc's (LON:LOOK) Recent Earnings Decline Worry You?

Simply Wall St

Understanding Lookers plc's (LON:LOOK) performance as a company requires examining more than earnings from one point in time. Today I will take you through a basic sense check to gain perspective on how Lookers is doing by evaluating its latest earnings with its longer term trend as well as its industry peers' performance over the same period.

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View our latest analysis for Lookers

How Did LOOK's Recent Performance Stack Up Against Its Past?

LOOK's trailing twelve-month earnings (from 31 December 2018) of UK£44m has declined by -9.2% compared to the previous year.

Furthermore, this one-year growth rate has been lower than its average earnings growth rate over the past 5 years of 5.1%, indicating the rate at which LOOK is growing has slowed down. What could be happening here? Well, let’s take a look at what’s occurring with margins and if the whole industry is experiencing the hit as well.

LSE:LOOK Income Statement, May 23rd 2019

In terms of returns from investment, Lookers has fallen short of achieving a 20% return on equity (ROE), recording 11% instead. Furthermore, its return on assets (ROA) of 3.3% is below the GB Specialty Retail industry of 6.2%, indicating Lookers's are utilized less efficiently. And finally, its return on capital (ROC), which also accounts for Lookers’s debt level, has declined over the past 3 years from 13% to 9.8%. This correlates with an increase in debt holding, with debt-to-equity ratio rising from 105% to 132% over the past 5 years.

What does this mean?

While past data is useful, it doesn’t tell the whole story. Generally companies that endure an extended period of reduction in earnings are going through some sort of reinvestment phase However, if the entire industry is struggling to grow over time, it may be a signal of a structural shift, which makes Lookers and its peers a higher risk investment. I suggest you continue to research Lookers to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for LOOK’s future growth? Take a look at our free research report of analyst consensus for LOOK’s outlook.
  2. Financial Health: Are LOOK’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

NB: Figures in this article are calculated using data from the trailing twelve months from 31 December 2018. This may not be consistent with full year annual report figures.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.