Declining Stock and Decent Financials: Is The Market Wrong About Ultimate Products Plc (LON:ULTP)?

editorial-team@simplywallst.com (Simply Wall St)

Thu, Apr 24, 2025, 2:02 AM 4 min read

It is hard to get excited after looking at Ultimate Products' (LON:ULTP) recent performance, when its stock has declined 39% over the past three months. 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 Ultimate Products' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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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 Ultimate Products is:

14% = UK£7.0m ÷ UK£49m (Based on the trailing twelve months to January 2025).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.14 in profit.

View our latest analysis for Ultimate Products

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Ultimate Products' Earnings Growth And 14% ROE

To begin with, Ultimate Products seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 9.4%. This probably laid the ground for Ultimate Products' moderate 9.8% net income growth seen over the past five years.

As a next step, we compared Ultimate Products' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 22% in the same period.

past-earnings-growth — LSE:ULTP Past Earnings Growth April 24th 2025

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Ultimate Products''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Ultimate Products Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 51% (or a retention ratio of 49%) for Ultimate Products suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Ultimate Products is determined to keep sharing its profits with shareholders which we infer from its long history of eight years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 50% of its profits over the next three years. Regardless, the future ROE for Ultimate Products is predicted to rise to 18% despite there being not much change expected in its payout ratio.

Conclusion

In total, it does look like Ultimate Products has some positive aspects to its business. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.