Is Kelly Partners Group Holdings Limited's (ASX:KPG) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Kelly Partners Group Holdings (ASX:KPG) has had a great run on the share market with its stock up by a significant 17% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Kelly Partners Group Holdings' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Kelly Partners Group Holdings

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 Kelly Partners Group Holdings is:

38% = AU$8.6m ÷ AU$23m (Based on the trailing twelve months to December 2019).

The 'return' is the income the business earned over the last year. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.38.

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. 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. 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 Kelly Partners Group Holdings' Earnings Growth And 38% ROE

Firstly, we acknowledge that Kelly Partners Group Holdings has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 17% which is quite remarkable. Under the circumstances, Kelly Partners Group Holdings' considerable five year net income growth of 34% was to be expected.

We then compared Kelly Partners Group Holdings' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 25% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Kelly Partners Group Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Kelly Partners Group Holdings Making Efficient Use Of Its Profits?

Kelly Partners Group Holdings has a three-year median payout ratio of 50% (where it is retaining 50% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Kelly Partners Group Holdings is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Kelly Partners Group Holdings has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 49%. Regardless, the future ROE for Kelly Partners Group Holdings is predicted to rise to 117% despite there being not much change expected in its payout ratio.

Conclusion

Overall, we are quite pleased with Kelly Partners Group Holdings' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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. 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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