Stock Spirits Group PLC's (LON:STCK) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?
Stock Spirits Group's (LON:STCK) stock is up by a considerable 21% over the past 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 Stock Spirits Group's 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. Put another way, it reveals the company's success at turning shareholder investments into profits.
Check out our latest analysis for Stock Spirits Group
How Is ROE Calculated?
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 Stock Spirits Group is:
5.6% = €20m ÷ €347m (Based on the trailing twelve months to September 2020).
The 'return' refers to a company's earnings over the last year. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.06.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
A Side By Side comparison of Stock Spirits Group's Earnings Growth And 5.6% ROE
At first glance, Stock Spirits Group's ROE doesn't look very promising. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 14%. Accordingly, Stock Spirits Group's low net income growth of 3.5% over the past five years can possibly be explained by the low ROE amongst other factors.
Next, on comparing Stock Spirits Group's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 3.5% in the same period.
Earnings growth is an important metric to consider when valuing a stock. 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. Has the market priced in the future outlook for STCK? You can find out in our latest intrinsic value infographic research report.
Is Stock Spirits Group Efficiently Re-investing Its Profits?
With a high three-year median payout ratio of 76% (or a retention ratio of 24%), most of Stock Spirits Group's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.
Moreover, Stock Spirits Group has been paying dividends for six years, which is a considerable amount of time, 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 47% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 11%, over the same period.
Summary
Overall, we have mixed feelings about Stock Spirits Group. While the company has posted a decent earnings growth, We do feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings at a higher rate of return. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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.
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