Are Scout24 SE's (ETR:G24) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?
Scout24 (ETR:G24) has had a rough three months with its share price down 4.7%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Scout24's ROE.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Scout24
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 Scout24 is:
12% = €171m ÷ €1.4b (Based on the trailing twelve months to September 2023).
The 'return' is the income the business earned over the last year. That means that for every €1 worth of shareholders' equity, the company generated €0.12 in profit.
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.
A Side By Side comparison of Scout24's Earnings Growth And 12% ROE
To begin with, Scout24 seems to have a respectable ROE. Even when compared to the industry average of 15% the company's ROE looks quite decent. This probably goes some way in explaining Scout24's moderate 17% growth over the past five years amongst other factors.
As a next step, we compared Scout24'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.
Earnings growth is a huge factor in stock valuation. 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. What is G24 worth today? The intrinsic value infographic in our free research report helps visualize whether G24 is currently mispriced by the market.
Is Scout24 Using Its Retained Earnings Effectively?
The high three-year median payout ratio of 79% (or a retention ratio of 21%) for Scout24 suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Moreover, Scout24 is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 43% over the next three years. As a result, the expected drop in Scout24's payout ratio explains the anticipated rise in the company's future ROE to 15%, over the same period.
Conclusion
On the whole, we do feel that Scout24 has some positive attributes. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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.
