Pepkor Holdings Limited's (JSE:PPH) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Most readers would already be aware that Pepkor Holdings' (JSE:PPH) stock increased significantly by 29% 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 study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Pepkor Holdings' ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Pepkor Holdings

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Pepkor Holdings is:

3.4% = R1.9b ÷ R56b (Based on the trailing twelve months to March 2020).

The 'return' is the yearly profit. So, this means that for every ZAR1 of its shareholder's investments, the company generates a profit of ZAR0.03.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

A Side By Side comparison of Pepkor Holdings' Earnings Growth And 3.4% ROE

As you can see, Pepkor Holdings' ROE looks pretty weak. Even when compared to the industry average of 9.3%, the ROE figure is pretty disappointing. Although, we can see that Pepkor Holdings saw a modest net income growth of 8.7% over the past five years. Therefore, the growth in earnings could probably have been caused by other variables. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Pepkor Holdings' growth is quite high when compared to the industry average growth of 1.3% in the same period, which is great to see.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Pepkor Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Pepkor Holdings Efficiently Re-investing Its Profits?

With a three-year median payout ratio of 33% (implying that the company retains 67% of its profits), it seems that Pepkor Holdings is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

While Pepkor Holdings has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 21% over the next three years. As a result, the expected drop in Pepkor Holdings' payout ratio explains the anticipated rise in the company's future ROE to 5.5%, over the same period.

Summary

Overall, we feel that Pepkor Holdings certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.

If you’re looking to trade Pepkor Holdings, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.