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Has Samuel Heath & Sons plc's (LON:HSM) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Simply Wall St
·4 min read

Samuel Heath & Sons' (LON:HSM) stock is up by a considerable 45% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Samuel Heath & Sons' 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Samuel Heath & Sons

How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Samuel Heath & Sons is:

13% = UK£594k ÷ UK£4.5m (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.13.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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.

Samuel Heath & Sons' Earnings Growth And 13% ROE

At first glance, Samuel Heath & Sons seems to have a decent ROE. Especially when compared to the industry average of 5.3% the company's ROE looks pretty impressive. However, we are curious as to how the high returns still resulted in flat growth for Samuel Heath & Sons in the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

We then compared Samuel Heath & Sons' net income growth with the industry and found that the company's growth figure is a bit less than the average industry growth rate of 1.5% 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Samuel Heath & Sons''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Samuel Heath & Sons Making Efficient Use Of Its Profits?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. We infer that the company has been reinvesting all of its profits to grow its business.

Summary

Overall, we feel that Samuel Heath & Sons certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Samuel Heath & Sons' past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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.

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