In This Article:
SEEK (ASX:SEK) has had a rough three months with its share price down 7.3%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on SEEK's ROE.
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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for SEEK
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 SEEK is:
1.8% = AU$50m ÷ AU$2.8b (Based on the trailing twelve months to December 2024).
The 'return' is the yearly profit. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.02.
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 SEEK's Earnings Growth And 1.8% ROE
It is quite clear that SEEK's ROE is rather low. Not just that, even compared to the industry average of 8.6%, the company's ROE is entirely unremarkable. Although, we can see that SEEK saw a modest net income growth of 15% over the past five years. Therefore, the growth in earnings could probably have been caused by other variables. For instance, the company has a low payout ratio or is being managed efficiently.
Next, on comparing SEEK's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 18% over the last few years.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is SEK fairly valued? This infographic on the company's intrinsic value has everything you need to know.