Will Weakness in Keller Group plc's (LON:KLR) Stock Prove Temporary Given Strong Fundamentals?

With its stock down 9.0% over the past month, it is easy to disregard Keller Group (LON:KLR). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Keller Group's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Keller Group is:

24% = UK£143m ÷ UK£597m (Based on the trailing twelve months to December 2024).

The 'return' is the yearly profit. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.24.

View our latest analysis for Keller Group

What Has ROE Got To Do With Earnings Growth?

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

Keller Group's Earnings Growth And 24% ROE

Firstly, we acknowledge that Keller Group has a significantly high ROE. Secondly, even when compared to the industry average of 15% the company's ROE is quite impressive. As a result, Keller Group's exceptional 31% net income growth seen over the past five years, doesn't come as a surprise.

Next, on comparing Keller Group's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 34% over the last few years.

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 KLR fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Keller Group Efficiently Re-investing Its Profits?

The three-year median payout ratio for Keller Group is 46%, which is moderately low. The company is retaining the remaining 54%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Keller Group is reinvesting its earnings efficiently.

Besides, Keller Group has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 26% over the next three years. Regardless, the future ROE for Keller Group is predicted to decline to 17% despite the anticipated decrease in the payout ratio. We reckon that there could probably be other factors that could be driving the forseen decline in the company's ROE.

Conclusion

On the whole, we feel that Keller Group's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.