Declining Stock and Decent Financials: Is The Market Wrong About Future plc (LON:FUTR)?

By
Simply Wall St
Published
February 20, 2022
LSE:FUTR
Source: Shutterstock

Future (LON:FUTR) has had a rough three months with its share price down 26%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Future'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Future

How Is ROE Calculated?

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 Future is:

7.7% = UK£66m ÷ UK£862m (Based on the trailing twelve months to September 2021).

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.

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. 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 Future's Earnings Growth And 7.7% ROE

When you first look at it, Future's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 8.6%. Moreover, we are quite pleased to see that Future's net income grew significantly at a rate of 73% over the last five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared Future's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 8.7% in the same period.

past-earnings-growth
LSE:FUTR Past Earnings Growth February 20th 2022

Earnings growth is an important metric to consider when valuing a stock. 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. What is FUTR worth today? The intrinsic value infographic in our free research report helps visualize whether FUTR is currently mispriced by the market.

Is Future Efficiently Re-investing Its Profits?

Future has a really low three-year median payout ratio of 4.7%, meaning that it has the remaining 95% left over to reinvest into its business. So it looks like Future is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, Future is determined to keep sharing its profits with shareholders which we infer from its long history of eight years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 2.5% over the next three years. As a result, the expected drop in Future's payout ratio explains the anticipated rise in the company's future ROE to 16%, over the same period.

Conclusion

Overall, we feel that Future certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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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