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With its stock down 7.2% over the past month, it is easy to disregard Super Retail Group (ASX:SUL). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Super Retail Group's ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for Super Retail Group
How Do You Calculate Return On Equity?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Super Retail Group is:
19% = AU$263m ÷ AU$1.4b (Based on the trailing twelve months to July 2023).
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$0.19.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
A Side By Side comparison of Super Retail Group's Earnings Growth And 19% ROE
To start with, Super Retail Group's ROE looks acceptable. Further, the company's ROE is similar to the industry average of 20%. Consequently, this likely laid the ground for the decent growth of 19% seen over the past five years by Super Retail Group.
We then performed a comparison between Super Retail Group'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. 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. Is Super Retail Group fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Super Retail Group Efficiently Re-investing Its Profits?
Super Retail Group has a significant three-year median payout ratio of 66%, meaning that it is left with only 34% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.