Does Skillcast Group plc's (LON:SKL) Weak Fundamentals Mean That The Market Could Correct Its Share Price?

Most readers would already be aware that Skillcast Group's (LON:SKL) stock increased significantly by 44% over the past three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Particularly, we will be paying attention to Skillcast 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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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 Skillcast Group is:

8.8% = UK£511k ÷ UK£5.8m (Based on the trailing twelve months to December 2024).

The 'return' is the income the business earned over the last year. That means that for every £1 worth of shareholders' equity, the company generated £0.09 in profit.

See our latest analysis for Skillcast Group

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. 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.

A Side By Side comparison of Skillcast Group's Earnings Growth And 8.8% ROE

On the face of it, Skillcast Group's ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 9.9%, we may spare it some thought. Having said that, Skillcast Group's five year net income decline rate was 55%. Remember, the company's ROE is a bit low to begin with. Hence, this goes some way in explaining the shrinking earnings.

So, as a next step, we compared Skillcast Group's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 15% over the last few years.

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. Doing so will help them establish if the stock's future looks promising or ominous. Is Skillcast Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Skillcast Group Using Its Retained Earnings Effectively?

Skillcast Group's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its LTM (or last twelve month) payout ratio of 90% (or a retention ratio of 9.6%). With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. To know the 2 risks we have identified for Skillcast Group visit our risks dashboard for free.

In addition, Skillcast Group has been paying dividends over a period of three years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 38% over the next three years.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Skillcast Group. Specifically, it has shown quite an unsatisfactory performance as far as earnings growth is concerned, and a poor ROE and an equally poor rate of reinvestment seem to be the reason behind this inadequate performance. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Skillcast Group and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.