Spark New Zealand Limited (NZSE:SPK) On An Uptrend: Could Fundamentals Be Driving The Stock?

Spark New Zealand's (NZSE:SPK) stock up by 5.1% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Spark New Zealand

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 Spark New Zealand is:

59% = NZ$1.1b ÷ NZ$1.9b (Based on the trailing twelve months to June 2023).

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$0.59 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Spark New Zealand's Earnings Growth And 59% ROE

To begin with, Spark New Zealand has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 6.4% which is quite remarkable. So, the substantial 23% net income growth seen by Spark New Zealand over the past five years isn't overly surprising.

We then performed a comparison between Spark New Zealand's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 23% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. What is SPK worth today? The intrinsic value infographic in our free research report helps visualize whether SPK is currently mispriced by the market.

Is Spark New Zealand Efficiently Re-investing Its Profits?

Spark New Zealand's very high three-year median payout ratio of 113% suggests that the company is paying more to its shareholders than what it is earning. Despite this, the company's earnings grew significantly as we saw above. Although, it could be worth keeping an eye on the high payout ratio as that's a huge risk. Our risks dashboard should have the 4 risks we have identified for Spark New Zealand.

Additionally, Spark New Zealand has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. 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 106%. Still, forecasts suggest that Spark New Zealand's future ROE will drop to 29% even though the the company's payout ratio is not expected to change by much.

Summary

On the whole, we do feel that Spark New Zealand has some positive attributes. Namely, its high earnings growth, which was likely due to its high ROE. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining hardly any of its profits. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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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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.