SFS Group (VTX:SFSN) has been doing well on the stock market, with its share price increasing by a significant 15% over the past three months. Given that the market rewards strong financials in the long run, I wonder if that will be the case this time as well. This time, I decided to focus on SFS Group's ROE.
Return on equity or ROE is an important factor to be considered by a shareholder as it indicates how effectively their capital is being reinvested. In other words, it is a profitability ratio that measures the rate of return on the capital provided by a company's shareholders.
Check out our latest analysis for SFS Group.
How do I calculate return on equity?
ROE can be calculated using the following formula:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
So, based on the above formula, SFS Group's ROE is:
21% = CHF 274 million ÷ CHF 130 million (based on the trailing twelve months to December 2023).
“Return” refers to a company's earnings over the past year. This means that for every CHF 1 worth of shareholders' equity, the company generated CHF 0.21 in profit.
What relationship does ROE have with 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 everything else remains constant, the higher the ROE and profit retention, the higher the company's growth rate compared to companies that don't necessarily have these characteristics.
SFS Group's earnings growth and 21% ROE
First of all, we like that SFS Group has a good ROE. The company's ROE is quite decent, even compared to the industry average of 17%. Therefore, his high ROE likely supported his SFS Group's modest growth of 9.4% over the past five years.
We then compared SFS Group's net income growth rate to the industry. The same he found that the company's growth rate was high when compared to the industry where in five years he recorded a growth rate of 4.7%.
Earnings growth is an important metric to consider when evaluating a stock. It's important for investors to know whether the market is pricing in a company's expected earnings growth (or decline). That way, you'll know if the stock is headed for clear blue waters or if a swamp awaits. Is SFSN fairly valued? This infographic on the company's intrinsic value contains everything you need to know.
Is SFS Group using its profits efficiently?
SFS Group's median three-year payout ratio is 34%, which means it retains the remaining 66% of its profits. This suggests that the dividend is well covered, and given the company's healthy growth, it appears that management is reinvesting earnings efficiently.
Additionally, SFS Group has been paying dividends for nine years. This means that the company is quite serious about sharing profits with shareholders. Looking at the current analyst consensus data, we see that the company's future dividend payout ratio is expected to rise to 48% over the next three years. Although the expected dividend payout ratio will increase, ROE is not expected to change significantly.
summary
Overall, we're quite satisfied with SFS Group's performance. Specifically, we like that the company reinvests a huge amount of its profits at a high rate of return. Of course, this significantly increased the company's revenue. With that said, the company's revenue growth is expected to slow, as predicted by current analyst forecasts. Learn more about the company's future revenue growth forecasts here. free Create a report on analyst forecasts to learn more about the company.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, 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.
