It’s hard to get excited looking at the recent performance of Personal Group Holdings (LON:PGH) when the stock is down 17% over the past three months. We decided to examine the company’s financials to see if the downtrend will continue, as a company’s long-term performance usually dictates market outcomes. In this article, we have chosen to focus on the ROE of Personal Group Holdings.
Return on equity, or ROE, is a test of how effectively a company is increasing its value and managing investors’ money. In other words, it is a profitability metric that measures the return on capital provided by the company’s shareholders.
Check out our latest analysis for Personal Group Holdings
How do you calculate return on equity?
The return on equity can be calculated using the following formula:
Return on Equity = Net Income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for personal group holdings is:
3.7% = £1.5m ÷ £40m (based on trailing 12 months to June 2022).
The “return” is the profit of the last twelve months. This means that for every £1 worth of equity, the company makes £0.04 profit.
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 those earnings the company reinvests, or “retains,” and how effectively it does so, we can then assess a company’s earnings growth potential. Assuming all else being equal, companies that demonstrate both higher return on equity and higher earnings retention tend to be those that exhibit a higher growth rate than companies that do not share the same characteristics.
Personal Group Holdings earnings growth and 3.7% ROE
At first glance, Personal Group Holdings’ ROE doesn’t look very promising. We then compared the company’s ROE to the industry as a whole and were disappointed to find that the ROE is below the industry average of 10%. As such, it might not be wrong to say that Personal Group Holdings’ five-year net income decline of 16% was likely the result of lower ROE. However, other factors can also cause earnings to fall. For example, it is possible that the company has allocated capital poorly or that the company has a very high payout ratio.
Next, when we compared it to the industry, which shrank its earnings by 7.1% over the same period, we still found Personal Group Holdings’ performance to be rather dismal, given that the company has shrunk its earnings faster than the industry.
Much of the basis for increasing the value of a company is tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Personal Group Holdings fairly valued compared to other companies? These 3 evaluation criteria could help you with the decision.
Is Personal Group Holdings reinvesting its profits efficiently?
Personal Group Holdings has a high three-year median payout ratio of 83% (meaning it retains 17% of its earnings). This suggests that the company pays out most of its profits as dividends to its shareholders. This explains to some extent why revenue has shrunk. With very little left to reinvest in the business, earnings growth is far from likely. You can see the 3 risks we have identified for Personal Group Holdings by visiting our Risk Dashboard for free on our platform here.
Additionally, Personal Group Holdings has paid dividends for at least a decade, meaning the company’s management is committed to paying dividends even if it means little to no earnings growth.
Overall, we would be extremely cautious before making any decision on Personal Group Holdings. The company has experienced a lack of earnings growth as it retains very little earnings and what little it retains is reinvested at a very low rate of return. However, given the current analyst estimates, we noted that the company’s earnings growth rate is expected to see a huge improvement. Are these analyst expectations based on broader expectations for the industry or on company fundamentals? Click here to go to our analyst’s forecast page for the company.
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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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