Has Gateley (Holdings) Plc's (LON:GTLY) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Gateley (Holdings)'s (LON:GTLY) stock is up by a considerable 13% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Gateley (Holdings)'s ROE today.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Gateley (Holdings)

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 Gateley (Holdings) is:

26% = UK£12m ÷ UK£45m (Based on the trailing twelve months to April 2020).

The 'return' is the yearly profit. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.26.

What Is The Relationship Between ROE And 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 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.

Gateley (Holdings)'s Earnings Growth And 26% ROE

First thing first, we like that Gateley (Holdings) has an impressive ROE. Secondly, even when compared to the industry average of 13% the company's ROE is quite impressive. Needless to say, we are quite surprised to see that Gateley (Holdings)'s net income shrunk at a rate of 6.1% over the past five years. So, there might be some other aspects that could explain this. These include low earnings retention or poor allocation of capital.

However, when we compared Gateley (Holdings)'s growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 16% in the same period. This is quite worrisome.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for GTLY? You can find out in our latest intrinsic value infographic research report.

Is Gateley (Holdings) Using Its Retained Earnings Effectively?

While the company did payout a portion of its dividend in the past, it currently doesn't pay a dividend. This implies that potentially all of its profits are being reinvested in the business.

Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 62% of its profits over the next three years.

Summary

In total, it does look like Gateley (Holdings) has some positive aspects to its business. 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. Up till now, we've only made a short study of the company's growth data. To gain further insights into Gateley (Holdings)'s past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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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