Moneysupermarket.com Group PLC's (LON:MONY) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

It is hard to get excited after looking at Moneysupermarket.com Group's (LON:MONY) recent performance, when its stock has declined 19% over the past three months. 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 Moneysupermarket.com 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

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

43% = UK£85m ÷ UK£197m (Based on the trailing twelve months to June 2020).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.43 in profit.

What Has ROE Got To Do With 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Moneysupermarket.com Group's Earnings Growth And 43% ROE

First thing first, we like that Moneysupermarket.com Group has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 22% also doesn't go unnoticed by us. Probably as a result of this, Moneysupermarket.com Group was able to see a decent net income growth of 8.2% over the last five years.

We then compared Moneysupermarket.com Group's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 13% in the same period, which is a bit concerning.

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. Is MONY fairly valued? This infographic on the company's intrinsic value has everything you need to know.

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

The high three-year median payout ratio of 70% (or a retention ratio of 30%) for Moneysupermarket.com Group suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Moneysupermarket.com Group is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 71% of its profits over the next three years. Accordingly, forecasts suggest that Moneysupermarket.com Group's future ROE will be 36% which is again, similar to the current ROE.

Conclusion

In total, it does look like Moneysupermarket.com Group has some positive aspects to its business. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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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