The Supers (JSE:SUR) share price has increased by 7.7% over the past three months. Since a company’s long-term fundamentals typically drive market outcomes, we wonder what role, if any, a company’s financials play in price movements. I think so. In particular, I would like to pay attention to Spur’s ROE today.
Return on equity or ROE tests how effectively a company is growing its value and managing investors’ money. In other words, this reveals that the company has been successful in turning shareholder investments into profits.
Check out our latest analysis for Spur.
How do you calculate return on equity?
Return on equity can be calculated using the following formula:
Return on equity = Net income (from continuing operations) ÷ Shareholders’ equity
So, based on the above formula, Spur’s ROE is:
29% = R245 million ÷ R835 million (based on the trailing twelve months to June 2024).
“Return” refers to a company’s earnings over the past year. This means that for every ZAR 1 worth of shareholders’ equity, the company generated R0.29 in profit.
Why is ROE important for profit growth?
So far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits a company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies with both higher return on equity and higher profit retention typically have higher growth rates when compared to companies that don’t have the same characteristics.
A side-by-side comparison of Spur’s earnings growth and ROE of 29%.
First of all, Spur appears to have a respectable ROE. Moreover, the company’s ROE is in line with the industry average of 29%. This certainly gives some context to the modest 19% growth in Spur’s net income over the past five years.
Next, when compared to the industry’s net income growth, we find that Spur’s reported growth rate is lower than the industry’s 32% growth over the past few years. This is what we don’t want to see.
Past revenue growth
The foundations that give a company value have a lot to do with its revenue growth. It’s important for investors to know whether the market is pricing in a company’s expected earnings growth (or decline). Doing so will help you determine whether a stock’s future is promising or ominous. One good indicator of expected earnings growth is the P/E ratio, which determines the price the market is willing to pay for a stock based on its earnings outlook. So you might want to check whether Spur is trading on a higher or lower P/E relative to its industry.
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Is Spur using its profits efficiently?
Spur’s three-year median payout ratio is a very high 74%, meaning only 26% is left to reinvest in the business. This means that the company has been able to achieve decent profit growth even though it is returning most of its profits to shareholders.
Additionally, Spur has been paying dividends for at least 10 years. This shows that the company is committed to sharing profits with its shareholders.
summary
Overall, there appear to be some positive aspects to Spur’s business. As mentioned above, the company is growing its earnings moderately. Still, the high ROE could have been more beneficial to investors if the company had reinvested more of its profits. As highlighted earlier, the current reinvestment rate appears to be quite low. Until now, we’ve only skimmed the surface of the company’s past performance by looking at the company’s fundamentals. Do your own research on Spur and see how it has performed in the past by checking out this free detailed graph of past earnings, revenue and cash flow.
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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
