Is Spark New Zealand Limited's (NZSE:SPK) Stock Price Struggling As A Result Of Its Mixed Financials?

Spark New Zealand (NZSE:SPK) has had a rough three months with its share price down 4.6%. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Specifically, we decided to study Spark New Zealand'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Spark New Zealand

How To Calculate Return On Equity?

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 Spark New Zealand is:

26% = NZ$384m ÷ NZ$1.5b (Based on the trailing twelve months to June 2021).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every NZ$1 worth of equity, the company was able to earn NZ$0.26 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Spark New Zealand's Earnings Growth And 26% ROE

To begin with, Spark New Zealand has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 7.8% the company's ROE is quite impressive. Despite this, Spark New Zealand's five year net income growth was quite flat over the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. These include low earnings retention or poor allocation of capital

We then compared Spark New Zealand's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 7.6% 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for SPK? You can find out in our latest intrinsic value infographic research report.

Is Spark New Zealand Efficiently Re-investing Its Profits?

Spark New Zealand has a very high three-year median payout ratio of 110% over the last last three years, which suggests that the company is dipping into more than just its earnings to pay its dividend. The absence of growth in Spark New Zealand's earnings therefore, doesn't come as a surprise. Its usually very hard to sustain dividend payments that are higher than reported profits. This is indicative of risk. To know the 3 risks we have identified for Spark New Zealand visit our risks dashboard for free.

In addition, Spark New Zealand 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 102%. Regardless, the future ROE for Spark New Zealand is predicted to rise to 31% despite there being not much change expected in its payout ratio.

Conclusion

Overall, we have mixed feelings about Spark New Zealand. Despite the high ROE, the company has a disappointing earnings growth number, due to its poor rate of reinvestment into its business. 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.

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.

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