Springfield Properties Plc's (LON:SPR) Stock Is Going Strong: Is the Market Following Fundamentals?

Springfield Properties' (LON:SPR) stock is up by a considerable 39% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Springfield Properties' ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Springfield Properties

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Springfield Properties is:

8.0% = UK£7.6m ÷ UK£96m (Based on the trailing twelve months to May 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 £0.08.

Why Is ROE Important For Earnings Growth?

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

Springfield Properties' Earnings Growth And 8.0% ROE

When you first look at it, Springfield Properties' ROE doesn't look that attractive. Although a closer study shows that the company's ROE is higher than the industry average of 6.6% which we definitely can't overlook. Even more so after seeing Springfield Properties' exceptional 25% net income growth over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Hence, there might be some other aspects that are causing earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.

Next, on comparing with the industry net income growth, we found that Springfield Properties' growth is quite high when compared to the industry average growth of 5.7% in the same period, which is great to see.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is SPR fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Springfield Properties Using Its Retained Earnings Effectively?

The three-year median payout ratio for Springfield Properties is 35%, which is moderately low. The company is retaining the remaining 65%. So it seems that Springfield Properties is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Besides, Springfield Properties has been paying dividends over a period of three years. 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 is expected to keep paying out approximately 32% of its profits over the next three years. Still, forecasts suggest that Springfield Properties' future ROE will rise to 16% even though the the company's payout ratio is not expected to change by much.

Conclusion

On the whole, we feel that Springfield Properties' performance has been quite good. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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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