Can Speedy Hire Plc (LON:SDY) Performance Keep Up Given Its Mixed Bag Of Fundamentals?
Speedy Hire's (LON:SDY) stock up by 3.2% over the past three months. However, we decided to study the company's mixed-bag of fundamentals to assess what this could mean for future share prices, as stock prices tend to be aligned with a company's long-term financial performance. In this article, we decided to focus on Speedy Hire's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. 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 Speedy Hire
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Speedy Hire is:
10% = UK£23m ÷ UK£222m (Based on the trailing twelve months to September 2022).
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 £0.10 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. 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.
Speedy Hire's Earnings Growth And 10% ROE
To begin with, Speedy Hire seems to have a respectable ROE. Even so, when compared with the average industry ROE of 13%, we aren't very excited. Additionally, the flat earnings seen by Speedy Hire over the past five years doesn't paint a very bright picture. Not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. Therefore, the flat earnings growth could be the result of other factors. For example, it could be that the company has a high payout ratio or the business has alloacted capital, for instance.
As a next step, we compared Speedy Hire'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 9.9% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 SDY fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Speedy Hire Making Efficient Use Of Its Profits?
Speedy Hire has a high three-year median payout ratio of 51% (or a retention ratio of 49%), meaning that the company is paying most of its profits as dividends to its shareholders. This does go some way in explaining why there's been no growth in its earnings.
Additionally, Speedy Hire 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 44%. However, Speedy Hire's ROE is predicted to rise to 14% despite there being no anticipated change in its payout ratio.
Conclusion
On the whole, we feel that the performance shown by Speedy Hire can be open to many interpretations. On the one hand, the company does have a decent rate of return, however, its earnings growth number is quite disappointing and as discussed earlier, the low retained earnings is hampering the growth. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink slightly in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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