NWF Group plc's (LON:NWF) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

By
Simply Wall St
Published
January 18, 2021

NWF Group (LON:NWF) has had a rough month with its share price down 9.8%. 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 NWF Group's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for NWF Group

How To Calculate Return On Equity?

ROE can be calculated by using the formula:

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

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

17% = UK£8.9m ÷ UK£51m (Based on the trailing twelve months to May 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.17.

Why Is ROE Important For 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. 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.

A Side By Side comparison of NWF Group's Earnings Growth And 17% ROE

At first glance, NWF Group seems to have a decent ROE. Especially when compared to the industry average of 6.0% the company's ROE looks pretty impressive. This certainly adds some context to NWF Group's decent 9.6% net income growth seen over the past five years.

As a next step, we compared NWF Group's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 32% in the same period.

AIM:NWF Past Earnings Growth January 18th 2021

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about NWF Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is NWF Group Efficiently Re-investing Its Profits?

With a three-year median payout ratio of 43% (implying that the company retains 57% of its profits), it seems that NWF Group is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Additionally, NWF 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 41%. Regardless, the future ROE for NWF Group is predicted to rise to 22% despite there being not much change expected in its payout ratio.

Conclusion

On the whole, we feel that NWF 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 respectable growth in its earnings. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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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