Should Weakness in Gateley (Holdings) Plc's (LON:GTLY) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?
With its stock down 8.4% over the past three months, it is easy to disregard Gateley (Holdings) (LON:GTLY). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Gateley (Holdings)'s ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Gateley (Holdings)
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 Gateley (Holdings) is:
16% = UK£12m ÷ UK£78m (Based on the trailing twelve months to April 2023).
The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.16 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. 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.
Gateley (Holdings)'s Earnings Growth And 16% ROE
To begin with, Gateley (Holdings) seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 14%. Despite the modest returns, Gateley (Holdings)'s five year net income growth was quite low, averaging at only 2.8%. So, there could be some other factors at play that could be impacting the company's growth. For instance, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
We then compared Gateley (Holdings)'s net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 6.4% in the same 5-year period, which is a bit concerning.
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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is GTLY fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Gateley (Holdings) Making Efficient Use Of Its Profits?
The high three-year median payout ratio of 68% (that is, the company retains only 32% of its income) over the past three years for Gateley (Holdings) suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.
Additionally, Gateley (Holdings) has paid dividends over a period of eight 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 59%.
Conclusion
On the whole, we do feel that Gateley (Holdings) has some positive attributes. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 3 risks we have identified for Gateley (Holdings) visit our risks dashboard for free.
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.
