Is Weakness In Kelly Partners Group Holdings Limited (ASX:KPG) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

By
Simply Wall St
Published
March 29, 2021
ASX:KPG

It is hard to get excited after looking at Kelly Partners Group Holdings' (ASX:KPG) recent performance, when its stock has declined 9.4% over the past week. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Kelly Partners Group Holdings' ROE in this article.

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.

Check out our latest analysis for Kelly Partners Group Holdings

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 Kelly Partners Group Holdings is:

53% = AU$13m ÷ AU$25m (Based on the trailing twelve months to December 2020).

The 'return' is the profit over the last twelve months. That means that for every A$1 worth of shareholders' equity, the company generated A$0.53 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Kelly Partners Group Holdings' Earnings Growth And 53% 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 15% which is quite remarkable. As a result, Kelly Partners Group Holdings' exceptional 42% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared Kelly Partners Group Holdings' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 11%.

past-earnings-growth
ASX:KPG Past Earnings Growth March 29th 2021

Earnings growth is a huge factor in stock valuation. 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. Is Kelly Partners Group Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.

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

The high three-year median payout ratio of 55% (implying that it keeps only 45% of profits) for Kelly Partners Group Holdings suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Besides, Kelly Partners Group Holdings has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 41% over the next three years. The fact that the company's ROE is expected to rise to 102% over the same period is explained by the drop in the payout ratio.

Conclusion

Overall, we are quite pleased with Kelly Partners Group Holdings' performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.

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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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