Spark New Zealand Limited's (NZSE:SPK) Has Had A Decent Run On The Stock market: Are Fundamentals In The Driver's Seat?

Spark New Zealand's (NZSE:SPK) stock up by 4.9% over the past month. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Spark New Zealand's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Spark New Zealand

How Do You 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 Spark New Zealand is:

26% = NZ$427m ÷ NZ$1.7b (Based on the trailing twelve months to December 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$0.26 in profit.

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. 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. 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 Spark New Zealand's Earnings Growth And 26% ROE

To begin with, Spark New Zealand has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 5.2% also doesn't go unnoticed by us. Probably as a result of this, Spark New Zealand was able to see a decent net income growth of 20% over the last five years.

As a next step, we compared Spark New Zealand's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 20% in the same period.

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. This then helps them determine if the stock is placed for a bright or bleak future. 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 113% suggesting that the company's shareholders are getting paid from more than just the company's earnings. Still the company's earnings have grown respectably. Although, the high payout ratio is certainly something we would keep an eye on if the company is not able to keep up its growth, or if business deteriorates. You can see the 3 risks we have identified for Spark New Zealand by visiting our risks dashboard for free on our platform here.

Besides, Spark New Zealand has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 109% of its profits over the next three years. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 29%.

Conclusion

Overall, we feel that Spark New Zealand certainly does have some positive factors to consider. Specifically, its high ROE which likely led to the growth in earnings. Bear in mind, the company reinvests little to none of its profits, which means that investors aren't necessarily reaping the full benefits of the high rate of return. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.