Skellerup Holdings' (NZSE:SKL) stock is up by 3.2% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Skellerup Holdings' 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.
How Is ROE Calculated?
Return on equity 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 Skellerup Holdings is:
20% = NZ$36m ÷ NZ$186m (Based on the trailing twelve months to December 2020).
The 'return' is the income the business earned over the last year. That means that for every NZ$1 worth of shareholders' equity, the company generated NZ$0.20 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.
Skellerup Holdings' Earnings Growth And 20% ROE
To start with, Skellerup Holdings' ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 12%. This probably laid the ground for Skellerup Holdings' moderate 10% net income growth seen over the past five years.
As a next step, we compared Skellerup Holdings' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 7.5%.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is SKL fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Skellerup Holdings Efficiently Re-investing Its Profits?
The high three-year median payout ratio of 83% (or a retention ratio of 17%) for Skellerup Holdings suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Besides, Skellerup Holdings has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 82%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 21%.
In total, we are pretty happy with Skellerup Holdings' performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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