Is Weakness In Next 15 Group plc (LON:NFG) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

Next 15 Group (LON:NFG) has had a rough three months with its share price down 52%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Next 15 Group'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Next 15 Group

How Do You 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 Next 15 Group is:

37% = UK£62m ÷ UK£170m (Based on the trailing twelve months to July 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.37 in profit.

Why Is ROE Important For 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. 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.

Next 15 Group's Earnings Growth And 37% ROE

First thing first, we like that Next 15 Group has an impressive ROE. Secondly, even when compared to the industry average of 10% the company's ROE is quite impressive. As a result, Next 15 Group's exceptional 32% net income growth seen over the past five years, doesn't come as a surprise.

We then performed a comparison between Next 15 Group's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 32% in the same 5-year period.

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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Next 15 Group is trading on a high P/E or a low P/E, relative to its industry.

Is Next 15 Group Efficiently Re-investing Its Profits?

Next 15 Group's three-year median payout ratio is a pretty moderate 25%, meaning the company retains 75% of its income. So it seems that Next 15 Group is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Additionally, Next 15 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 23% of its profits over the next three years. Accordingly, forecasts suggest that Next 15 Group's future ROE will be 31% which is again, similar to the current ROE.

Conclusion

Overall, we are quite pleased with Next 15 Group's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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.

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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.