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Fuller Smith & Turner (LON:FSTA) has had a great run on the share market with its stock up by a significant 24% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Fuller Smith & Turner'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. Put another way, it reveals the company's success at turning shareholder investments into profits.
Check out our latest analysis for Fuller Smith & Turner
How To 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 Fuller Smith & Turner is:
2.1% = UK£9.1m ÷ UK£431m (Based on the trailing twelve months to March 2024).
The 'return' is the amount earned after tax over the last twelve months. That means that for every £1 worth of shareholders' equity, the company generated £0.02 in profit.
What Has ROE Got To Do With 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. 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.
Fuller Smith & Turner's Earnings Growth And 2.1% ROE
It is hard to argue that Fuller Smith & Turner's ROE is much good in and of itself. Even compared to the average industry ROE of 8.8%, the company's ROE is quite dismal. Although, we can see that Fuller Smith & Turner saw a modest net income growth of 11% over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.
Next, on comparing Fuller Smith & Turner's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 11% 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Fuller Smith & Turner's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.