Has Shaver Shop Group Limited's (ASX:SSG) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Shaver Shop Group's (ASX:SSG) stock is up by a considerable 16% over the past three months. 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. In this article, we decided to focus on Shaver Shop Group'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Shaver Shop Group

How Do You Calculate Return On Equity?

Return on equity 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 Shaver Shop Group is:

17% = AU$11m ÷ AU$64m (Based on the trailing twelve months to June 2020).

The 'return' is the income the business earned 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$0.17 in profit.

What Has ROE Got To Do With 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. 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.

Shaver Shop Group's Earnings Growth And 17% ROE

At first glance, Shaver Shop Group seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 17%. Despite the moderate return on equity, Shaver Shop Group has posted a net income growth of 2.0% over the past five years. We reckon that a low growth, when returns are moderate could be the result of certain circumstances like low earnings retention or poor allocation of capital.

As a next step, we compared Shaver Shop Group's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 9.6% in the same period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Shaver Shop Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shaver Shop Group Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 57% (that is, the company retains only 43% of its income) over the past three years for Shaver Shop Group suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

Additionally, Shaver Shop Group has paid dividends over a period of four years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 63% of its profits over the next three years. Regardless, the future ROE for Shaver Shop Group is predicted to rise to 21% despite there being not much change expected in its payout ratio.

Conclusion

In total, it does look like Shaver Shop Group has some positive aspects to its business. 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. 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 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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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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