Stock Analysis

Does Strategic Education, Inc.'s (NASDAQ:STRA) Weak Fundamentals Mean A Downturn In Its Stock Should Be Expected?

NasdaqGS:STRA
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Strategic Education's (NASDAQ:STRA) stock is up by 7.7% over the past three months. Given that the markets usually pay for the long-term financial health of a company, we wonder if the current momentum in the share price will keep up, given that the company's financials don't look very promising. In this article, we decided to focus on Strategic Education's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Strategic Education

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 Strategic Education is:

7.4% = US$126m ÷ US$1.7b (Based on the trailing twelve months to September 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.07.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

Strategic Education's Earnings Growth And 7.4% ROE

At first glance, Strategic Education's ROE doesn't look very promising. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 15% either. Hence, the flat earnings seen by Strategic Education over the past five years could probably be the result of it having a lower ROE.

We then compared Strategic Education's net income growth with the industry and found that the average industry growth rate was 21% in the same 5-year period.

past-earnings-growth
NasdaqGS:STRA Past Earnings Growth January 16th 2025

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is STRA worth today? The intrinsic value infographic in our free research report helps visualize whether STRA is currently mispriced by the market.

Is Strategic Education Efficiently Re-investing Its Profits?

Strategic Education has a very high three-year median payout ratio of 114% 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 Strategic Education's earnings therefore, doesn't come as a surprise. Paying a dividend beyond their means is usually not viable over the long term. That's a huge risk in our books.

In addition, Strategic Education has been paying dividends over a period of eight years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

Overall, we would be extremely cautious before making any decision on Strategic Education. Particularly, its ROE is a huge disappointment, not to mention its lack of proper reinvestment into the business. As a result its earnings growth has also been quite disappointing. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings 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.