Kitwave Group plc's (LON:KITW) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 20% over the past three months, it is easy to disregard Kitwave Group (LON:KITW). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Kitwave 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Kitwave Group

How To 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 Kitwave Group is:

21% = UK£18m ÷ UK£85m (Based on the trailing twelve months to October 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.21 in profit.

What Is The Relationship Between ROE And Earnings Growth?

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

Kitwave Group's Earnings Growth And 21% ROE

At first glance, Kitwave Group seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 16%. This certainly adds some context to Kitwave Group's exceptional 52% net income growth seen over the past five years. However, there could also be other causes behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Kitwave Group's growth is quite high when compared to the industry average growth of 16% in the same period, which is great to see.

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 Kitwave Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Kitwave Group Efficiently Re-investing Its Profits?

The three-year median payout ratio for Kitwave Group is 45%, which is moderately low. The company is retaining the remaining 55%. By the looks of it, the dividend is well covered and Kitwave Group is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Kitwave Group is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 37% of its profits over the next three years. As a result, Kitwave Group's ROE is not expected to change by much either, which we inferred from the analyst estimate of 18% for future ROE.

Summary

On the whole, we feel that Kitwave 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.