Yahoo Finance Spark New Zealand Limited (NZSE:SPK) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?
Spark New Zealand (NZSE:SPK) has had a rough three months with its share price down 8.0%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Spark New Zealand's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Spark New Zealand
How Do You Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Spark New Zealand is:
26% = NZ$427m ÷ NZ$1.7b (Based on the trailing twelve months to December 2023).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every NZ$1 worth of equity, the company was able to earn NZ$0.26 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
A Side By Side comparison of Spark New Zealand's Earnings Growth And 26% ROE
Firstly, we acknowledge that Spark New Zealand has a significantly high ROE. Secondly, even when compared to the industry average of 5.2% the company's ROE is quite impressive. Probably as a result of this, Spark New Zealand was able to see a decent net income growth of 20% over the last five years.
We then performed a comparison between Spark New Zealand's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 20% in the same 5-year period.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. What is SPK worth today? The intrinsic value infographic in our free research report helps visualize whether SPK is currently mispriced by the market.
Is Spark New Zealand Making Efficient Use Of Its Profits?
The really high three-year median payout ratio of 113% for Spark New Zealand suggests that the company is paying its shareholders more than what it is earning. In spite of this, the company was able to grow its earnings respectably, as we saw above. It would still be worth keeping an eye on that high payout ratio, if for some reason the company runs into problems and business deteriorates. To know the 3 risks we have identified for Spark New Zealand visit our risks dashboard for free.
Besides, Spark New Zealand has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 109%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 30%.
Conclusion
Overall, we feel that Spark New Zealand certainly does have some positive factors to consider. Especially the growth in earnings which was backed by an impressive ROE. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be negligible. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for 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 only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
