NWF Group's (LON:NWF) stock up by 8.3% over the past three months. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study NWF Group's ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for NWF Group
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for NWF Group is:
12% = UK£8.4m ÷ UK£68m (Based on the trailing twelve months to May 2022).
The 'return' is the income the business earned over the last year. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.12.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
NWF Group's Earnings Growth And 12% ROE
To start with, NWF Group's ROE looks acceptable. Even so, when compared with the average industry ROE of 18%, we aren't very excited. On further research, we found that NWF Group's earnings over the past five years have been pretty flat. Bear in mind, the company does have a respectable level of ROE. It is just that the industry ROE is higher. Therefore, the flat earnings growth could be the result of other factors. For example, it could be that the company has a high payout ratio or the business has alloacted capital, for instance.
We then compared NWF Group's net income growth with the industry and found that the average industry growth rate was 13% in the same period.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks 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 prospects. So, you may want to check if NWF Group is trading on a high P/E or a low P/E, relative to its industry.
Is NWF Group Making Efficient Use Of Its Profits?
Despite having a moderate three-year median payout ratio of 44% (meaning the company retains56% of profits) in the last three-year period, NWF Group's earnings growth was more or les flat. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.
Additionally, NWF Group has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no 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 43%. Still, forecasts suggest that NWF Group's future ROE will rise to 15% even though the the company's payout ratio is not expected to change by much.
On the whole, we do feel that NWF Group has some positive attributes. However, while the company does have a decent ROE and a high profit retention, its earnings growth number is quite disappointing. This suggests that there might be some external threat to the business, that's hampering growth. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. 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.
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