Moneysupermarket.com Group PLC's (LON:MONY) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?
Moneysupermarket.com Group (LON:MONY) has had a great run on the share market with its stock up by a significant 13% over the last three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Particularly, we will be paying attention to Moneysupermarket.com Group's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Moneysupermarket.com Group
How Do You 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:
32% = UK£69m ÷ UK£215m (Based on the trailing twelve months to December 2022).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.32 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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
Moneysupermarket.com Group's Earnings Growth And 32% ROE
Firstly, we acknowledge that Moneysupermarket.com Group has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 18% which is quite remarkable. For this reason, Moneysupermarket.com Group's five year net income decline of 9.1% raises the question as to why the high ROE didn't translate into earnings growth. We reckon that there could be some other factors at play here that are preventing the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.
That being said, we compared Moneysupermarket.com Group's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 4.6% 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. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for MONY? You can find out in our latest intrinsic value infographic research report.
Is Moneysupermarket.com Group Making Efficient Use Of Its Profits?
Moneysupermarket.com Group's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 100% (or a retention ratio of 0.3%). With only very little left to reinvest into the business, growth in earnings is far from likely.
Moreover, Moneysupermarket.com Group has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 66% over the next three years. As a result, the expected drop in Moneysupermarket.com Group's payout ratio explains the anticipated rise in the company's future ROE to 43%, over the same period.
Summary
In total, we're a bit ambivalent about Moneysupermarket.com Group's performance. While the company does have a high rate of return, its low earnings retention is probably what's hampering its earnings growth. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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.
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