SEC Newgate S.p.A.'s (LON:SECN) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?
SEC Newgate (LON:SECN) has had a rough three months with its share price down 8.9%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study SEC Newgate's ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for SEC Newgate
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 SEC Newgate is:
12% = €2.3m ÷ €20m (Based on the trailing twelve months to June 2021).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.12 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
SEC Newgate's Earnings Growth And 12% ROE
To begin with, SEC Newgate seems to have a respectable ROE. On comparing with the average industry ROE of 8.6% the company's ROE looks pretty remarkable. This certainly adds some context to SEC Newgate's decent 8.7% net income growth seen over the past five years.
As a next step, we compared SEC Newgate's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 8.7% 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. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if SEC Newgate is trading on a high P/E or a low P/E, relative to its industry.
Is SEC Newgate Efficiently Re-investing Its Profits?
SEC Newgate's three-year median payout ratio to shareholders is 14% (implying that it retains 86% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.
While SEC Newgate has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 6.4% over the next three years.
Summary
In total, we are pretty happy with SEC Newgate's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard would have the 2 risks we have identified for SEC Newgate.
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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.
