Next 15 Group plc's (LON:NFG) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 33% over the past three months, it is easy to disregard Next 15 Group (LON:NFG). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Next 15 Group's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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How Is ROE Calculated?

Return on equity 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:

23% = UK£41m ÷ UK£181m (Based on the trailing twelve months to January 2025).

The 'return' is the yearly profit. That means that for every £1 worth of shareholders' equity, the company generated £0.23 in profit.

See our latest analysis for Next 15 Group

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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.

Next 15 Group's Earnings Growth And 23% ROE

Firstly, we acknowledge that Next 15 Group has a significantly high ROE. Secondly, even when compared to the industry average of 9.9% the company's ROE is quite impressive. As a result, Next 15 Group's exceptional 46% net income growth seen over the past five years, doesn't come as a surprise.

Next, on comparing with the industry net income growth, we found that Next 15 Group's growth is quite high when compared to the industry average growth of 29% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Next 15 Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Next 15 Group Making Efficient Use Of Its Profits?

The three-year median payout ratio for Next 15 Group is 29%, which is moderately low. The company is retaining the remaining 71%. 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.

Besides, Next 15 Group has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its 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 28%. However, Next 15 Group's ROE is predicted to rise to 30% despite there being no anticipated change in its payout ratio.

Conclusion

Overall, we are quite pleased with Next 15 Group's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.