Super Retail Group Limited's (ASX:SUL) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Super Retail Group's (ASX:SUL) stock is up by a considerable 6.4% over the past month. 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. Particularly, we will be paying attention to Super Retail Group's ROE today.

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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Super Retail Group

How Do You Calculate Return On Equity?

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 Super Retail Group is:

11% = AU$110m ÷ AU$991m (Based on the trailing twelve months to June 2020).

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$0.11 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. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Super Retail Group's Earnings Growth And 11% ROE

At first glance, Super Retail Group seems to have a decent ROE. Yet, the fact that the company's ROE is lower than the industry average of 17% does temper our expectations. Although, we can see that Super Retail Group saw a modest net income growth of 10% over the past five years. Therefore, the growth in earnings could probably have been caused by other variables. Such as - high earnings retention or an efficient management in place. Bear in mind, the company does have a respectable level of ROE. It is just that the industry ROE is higher. So this also does lend some color to the fairly high earnings growth seen by the company.

We then performed a comparison between Super Retail Group's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 9.6% in the same period.

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

Is Super Retail Group Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 75% (or a retention ratio of 25%) for Super Retail Group suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, Super Retail Group has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 66% of its profits over the next three years. Regardless, the future ROE for Super Retail Group is predicted to rise to 15% despite there being not much change expected in its payout ratio.

Conclusion

Overall, we feel that Super Retail Group certainly does have some positive factors to consider. Specifically, its respectable ROE which likely led to the considerable growth in earnings. 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. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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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