Sumo Group (LON: SUMO) has had a great run in the stock market with its stock rising 14% over the past three months. Because stock prices tend to be aligned with a company’s financial performance over the long term, we decided to take a closer look at its financial indicators to see if they played a role in recent price action. In particular, we decided to study Sumo Group‘s ROE in this article.
ROE, or return on equity, is a useful tool for assessing how effectively a company can generate returns on the investments received from its shareholders. Put simply, it evaluates the profitability of a company in relation to its equity.
Check out our latest analysis for Sumo Group
How do you calculate the return on equity?
The ROE can be calculated using the formula:
Return on Equity = Net Income (from continuing operations) Ã· Equity
So, based on the above formula, the ROE for the Sumo Group is:
1.7% = UK Â£ 1.6m Ã· UK Â£ 96m (based on the last 12 months through December 2020).
The âreturnâ is the income that the company has earned over the past year. That means the company made Â£ 0.02 in profit for every Â£ 1 worth of equity.
What does ROE have to do with earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. We now need to evaluate how much profit the company is reinvesting or âkeepingâ for future growth, which then gives us an idea of ââthe company’s growth potential. Assuming all else is equal, companies that have both higher return on equity and higher earnings retention typically have a higher growth rate than companies that do not share the same characteristics.
A side-by-side comparison of Sumo Group’s earnings growth and ROE of 1.7%
It’s hard to argue that the sumo group’s ROE is very good in and of itself. Even compared to the industry average of 13%, the ROE figure is pretty disappointing. Even so, the Sumo Group surprisingly posted exceptional net profit growth of 44% over the past five years. We believe there could be other aspects that will positively impact the company’s earnings growth. For example, the company has a low payout ratio or is run efficiently.
Next, when we compared Sumo Group’s net income growth to the industry, we found that the company’s reported growth is similar to the industryâs average growth rate of 37% over the same period.
Earnings growth is an important metric to consider when evaluating a stock. It is important for an investor to know if the market has factored in the company’s expected earnings growth (or decline). That way, they can determine whether the future of the stock looks promising or ominous. If you’re wondering about Sumo Group’s valuation, check out this price-earnings ratio versus its industry.
Is Sumo Group Using Its Retained Profits Effectively?
Overall, we feel that the Sumo Group certainly has some positive factors to consider. Despite the low return, the company has achieved impressive earnings growth through extensive reinvestments in its business. In studying the latest analyst estimates, we found that analysts expect the company to continue on its recent growth trajectory. To learn more about the company’s future earnings growth projections, take a look at this free Report on analyst forecast for the company to learn more.
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