Is SG Fleet Group Limited's (ASX:SGF) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

By
Simply Wall St
Published
November 09, 2021
ASX:SGF
Source: Shutterstock

Most readers would already be aware that SG Fleet Group's (ASX:SGF) stock increased significantly by 9.8% over the past week. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study SG Fleet Group's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for SG Fleet Group

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 SG Fleet Group is:

12% = AU$44m ÷ AU$378m (Based on the trailing twelve months to June 2021).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.12 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

SG Fleet Group's Earnings Growth And 12% ROE

To begin with, SG Fleet Group seems to have a respectable ROE. Especially when compared to the industry average of 7.6% the company's ROE looks pretty impressive. As you might expect, the 6.6% net income decline reported by SG Fleet Group is a bit of a surprise. We reckon that there could be some other factors at play here that are preventing the company's growth. These include low earnings retention or poor allocation of capital.

So, as a next step, we compared SG Fleet Group's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 11% in the same period.

past-earnings-growth
ASX:SGF Past Earnings Growth November 9th 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 SG Fleet Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is SG Fleet Group Efficiently Re-investing Its Profits?

SG Fleet Group's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 74% (or a retention ratio of 26%). With only very little left to reinvest into the business, growth in earnings is far from likely. To know the 3 risks we have identified for SG Fleet Group visit our risks dashboard for free.

Moreover, SG Fleet Group has been paying dividends for seven years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 61% of its profits over the next three years. Still, forecasts suggest that SG Fleet Group's future ROE will rise to 20% even though the the company's payout ratio is not expected to change by much.

Summary

Overall, we feel that SG Fleet Group certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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