Has Moneysupermarket.com Group PLC's (LON:MONY) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Most readers would already be aware that Moneysupermarket.com Group's (LON:MONY) stock increased significantly by 11% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Moneysupermarket.com Group's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Moneysupermarket.com 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 Moneysupermarket.com Group is:

33% = UK£69m ÷ UK£209m (Based on the trailing twelve months to December 2020).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.33 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 Moneysupermarket.com Group's Earnings Growth And 33% ROE

To begin with, Moneysupermarket.com Group has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 21% also doesn't go unnoticed by us. Yet, Moneysupermarket.com Group has posted measly growth of 4.9% over the past five years. This is interesting as the high returns should mean that the company has the ability to generate high growth but for some reason, it hasn't been able to do so. A few likely reasons why this could happen is that the company could have a high payout ratio or the business has allocated capital poorly, for instance.

As a next step, we compared Moneysupermarket.com 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 11% in the same period.

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. This then helps them determine if the stock is placed for a bright or bleak future. What is MONY worth today? The intrinsic value infographic in our free research report helps visualize whether MONY is currently mispriced by the market.

Is Moneysupermarket.com Group Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 70% (that is, the company retains only 30% of its income) over the past three years for Moneysupermarket.com Group suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

In addition, Moneysupermarket.com Group has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. 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 81%. Still, forecasts suggest that Moneysupermarket.com Group's future ROE will rise to 41% even though the the company's payout ratio is not expected to change by much.

Summary

In total, it does look like Moneysupermarket.com Group has some positive aspects to its business. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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. 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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