Sureserve Group (LON:SUR) had a tough week, shedding 4.1%. But if you look closely, you might find that the strong financials could mean that the stock could potentially add value over the long term given how markets typically reward companies with good financial health. Specifically, we decided to examine Sureserve Group‘s ROE in this article.
Return on equity, or ROE, is a test of how effectively a company is increasing its value and managing investors’ money. Put simply, it is used to assess a company’s profitability in relation to its equity.
Check out our latest analysis for Sureserve Group
How do you calculate return on equity?
That Formula for return on equity is:
Return on Equity = Net Income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for Sureserve Group is:
18% = UK£12m ÷ UK£68m (Based on trailing 12 months to March 2022).
The “return” is the profit of the last twelve months. So this means that for every £1 of investment by its shareholders, the company makes £0.18 of profit.
Why is ROE important for earnings growth?
So far we’ve learned that ROE measures how efficiently a company generates its profits. Depending on how much of these earnings the company reinvests, or “retains,” and how effectively it does so, we can assess a company’s earnings growth potential. Assuming all else remains the same, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
A head-to-head comparison of Sureserve Group’s earnings growth and 18% ROE
First off, Sureserve Group appears to have a respectable ROE. Additionally, the company’s ROE compares fairly favorably to the industry average of 11%. That likely laid the groundwork for Sureserve Group’s significant 73% net income growth over the past five years. We believe there could be other aspects positively impacting the company’s earnings growth as well. For example, it’s possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.
Next, when we compare it to industry net income growth, we find that the growth number reported by Sureserve Group compares fairly favorably to the industry average, which shows a 3.8% decline over the same period.
Much of the basis for increasing the value of a company is tied to its earnings growth. Next, investors need to determine whether expected earnings growth, or lack of it, is already embedded in the stock price. That way they have an idea of whether the stock is headed into clear blue waters or if swampy waters await them. Has the market priced in future prospects for SUR? You can find out in our latest intrinsic value research report in the form of an infographic.
Does Sureserve Group use its retained earnings effectively?
While the company has historically paid a portion of its dividend, it currently pays no dividend. This is likely the reason for the high earnings growth mentioned above.
Overall, we are quite pleased with Sureserve Group’s performance. What we particularly like is that the company reinvests heavily in its business, and with a high rate of return. Unsurprisingly, this has resulted in impressive earnings growth. If the company continues to grow earnings at the pace it has been, it could have a positive impact on the stock price, as earnings per share affect long-term stock prices. Let’s not forget that business risk is also one of the factors affecting stock price. So, this is also an important area for investors to pay attention to before making a decision about any deal. To learn the 1 risk we have identified for Sureserve Group, visit our risk dashboard for free.
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This Simply Wall St article is of a general nature. We provide comments based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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