Could The Market Be Wrong About Kingspan Group plc (ISE:KRX) Given Its Attractive Financial Prospects?

Kingspan Group (ISE:KRX) has had a rough week with its share price down 3.1%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Kingspan Group's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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How To Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Kingspan Group is:

15% = €715m ÷ €4.6b (Based on the trailing twelve months to June 2025).

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 €0.15 in profit.

Check out our latest analysis for Kingspan Group

Why Is ROE Important For 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 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.

Kingspan Group's Earnings Growth And 15% ROE

To start with, Kingspan Group's ROE looks acceptable. On comparing with the average industry ROE of 8.9% the company's ROE looks pretty remarkable. This probably laid the ground for Kingspan Group's moderate 11% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Kingspan Group's growth is quite high when compared to the industry average growth of 2.2% in the same period, which is great to see.

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

Is Kingspan Group Efficiently Re-investing Its Profits?

Kingspan Group has a low three-year median payout ratio of 15%, meaning that the company retains the remaining 85% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Moreover, Kingspan 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. 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 14%. As a result, Kingspan Group's ROE is not expected to change by much either, which we inferred from the analyst estimate of 15% for future ROE.

Conclusion

Overall, we are quite pleased with Kingspan Group's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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.