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Moneysupermarket.com Group PLC's (LON:MONY) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

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It is hard to get excited after looking at Moneysupermarket.com Group's (LON:MONY) recent performance, when its stock has declined 6.9% over the past three months. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Moneysupermarket.com Group's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Moneysupermarket.com Group

How To Calculate Return On Equity?

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 Moneysupermarket.com Group is:

30% = UK£57m ÷ UK£192m (Based on the trailing twelve months to June 2021).

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 £0.30.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Moneysupermarket.com Group's Earnings Growth And 30% ROE

Firstly, we acknowledge that Moneysupermarket.com Group has a significantly high ROE. Secondly, even when compared to the industry average of 19% the company's ROE is quite impressive. Given the circumstances, we can't help but wonder why Moneysupermarket.com Group saw little to no growth in the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

As a next step, we compared Moneysupermarket.com 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 23% in the same period.

past-earnings-growth
past-earnings-growth

Earnings growth is a huge factor in stock valuation. 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 MONY fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Moneysupermarket.com Group Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 70% (implying that the company keeps only 30% of its income) of its business to reinvest into its business), most of Moneysupermarket.com Group's profits are being paid to shareholders, which explains the absence of growth in earnings.

Additionally, Moneysupermarket.com Group has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. 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 79%. However, Moneysupermarket.com Group's ROE is predicted to rise to 39% despite there being no anticipated change in its payout ratio.

Summary

In total, it does look like Moneysupermarket.com Group has some positive aspects to its business. 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. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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.

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