Yahoo Finance Is Spirax-Sarco Engineering plc's (LON:SPX) Recent Stock Performance Influenced By Its Financials In Any Way?
Most readers would already know that Spirax-Sarco Engineering's (LON:SPX) stock increased by 6.8% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Spirax-Sarco Engineering's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for Spirax-Sarco Engineering
How To 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 Spirax-Sarco Engineering is:
19% = UK£225m ÷ UK£1.2b (Based on the trailing twelve months to December 2022).
The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.19 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the 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 that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Spirax-Sarco Engineering's Earnings Growth And 19% ROE
To begin with, Spirax-Sarco Engineering seems to have a respectable ROE. Especially when compared to the industry average of 14% the company's ROE looks pretty impressive. Yet, Spirax-Sarco Engineering has posted measly growth of 4.7% over the past five years. That's a bit unexpected from a company which has such a high rate of return. A few likely reasons why this could happen is that the company could have a high payout ratio or the business has allocated capital poorly, for instance.
As a next step, we compared Spirax-Sarco Engineering's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 7.0% in the same period.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Spirax-Sarco Engineering's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Spirax-Sarco Engineering Using Its Retained Earnings Effectively?
While Spirax-Sarco Engineering has a decent three-year median payout ratio of 48% (or a retention ratio of 52%), it has seen very little growth in earnings. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.
Moreover, Spirax-Sarco Engineering has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. 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 41%. As a result, Spirax-Sarco Engineering's ROE is not expected to change by much either, which we inferred from the analyst estimate of 21% for future ROE.
Conclusion
Overall, we feel that Spirax-Sarco Engineering certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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.
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