Most readers should already be aware that YouGov (LON: YOU) stock has risen significantly by 23% in the past three months. As most know, fundamentals usually determine long-term market price movements. So today we decided to examine the company’s key financial indicators to see if they are playing a role in recent price action. In this article, we decided to focus on YouGov’s ROE.
Return on Equity, or ROE, is a test of how effectively a company is increasing its value and managing investors’ money. Put simply, it evaluates a company’s profitability in relation to its equity.
Check out our latest analysis for YouGov
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 formula above, the ROE for YouGov is:
7.8% = UK Â£ 8.3m Ã· UKGB 106m (based on the last twelve months through January 2021).
The “return” is the amount earned after tax over the past twelve months. One way to conceptualize this is that for every Â£ 1 of shareholder equity the company made a profit of Â£ 0.08.
What is the Relationship Between ROE and Earnings Growth?
So far we have learned that ROE is a measure of a company’s profitability. We now need to assess how much profit the company can reinvest or “keep” 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.
YouGov earnings growth and 7.8% ROE
At first glance, YouGov’s ROE doesn’t look that attractive. However, the ROE is in line with the industry average of 8.0%, so we’re not going to lay off the company entirely. Additionally, we are delighted that YouGov’s net income has grown significantly at a rate of 25% over the past five years. Since the ROE is not particularly high, we assume that other factors could also influence the company’s growth. For example, it’s possible that the company’s management has made good strategic decisions or the company has a low payout ratio.
We then compared YouGov’s net profit growth to that of the industry and are pleased to see that the company’s growth is higher compared to the industry with a 2.2% growth rate over the same period.
Earnings growth is an important metric to consider when evaluating a stock. The investor should try to figure out whether it is pricing in expected growth or decline in earnings, whatever the case. That way, they’ll have an idea of ââwhether the stock is getting into clear blue water or expecting boggy water. If you’re wondering about YouGov’s rating, check out this price-to-earnings ratio versus the industry.
Is YouGov Using Its Retained Profits Effectively?
YouGov’s average payout ratio over three years is a fairly modest 32%, which means the company keeps 68% of its income. This suggests that the dividend is well covered, and given the high growth we discussed above, it looks like YouGov is efficiently reinvesting its profits.
Additionally, YouGov is determined to continue to share its profits with shareholders, which we infer from its long history of nine years of paying dividends. While studying the latest analyst consensus data, we found that the company is expected to pay off about 29% of its earnings over the next three years.
By and large, we think YouGov has some positive qualities. With a high reinvestment rate, albeit with a low ROE, the company has succeeded in significantly increasing its earnings. However, given the latest analyst estimates, we’ve determined that the company’s earnings are likely to gain momentum. Are these analyst expectations based on broad industry expectations or company fundamentals? Click here to go to our analysts forecast page for the company.
To start trading with YouGov, open an account with the lowest cost * platform trusted by the pros. Interactive brokers. Your clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide through a single integrated account.
This article from Simply Wall St is of a general nature. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamentals. Note that our analysis may not take into account the latest company announcements or quality material, which may be sensitive to the price. Simply Wall St has no position in the stocks mentioned.
*Interactive Brokers is rated the cheapest broker by StockBrokers.com
Do you have any feedback on this article? Concerned about the content? Get in touch directly with us. Alternatively, send an email to the editorial team (at) simplywallst.com.