Sim Leisure Group (Catalist:URR) has had a great run on the share market with its stock up by a significant 43% 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. Particularly, we will be paying attention to Sim Leisure Group's ROE today.
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 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 Sim Leisure Group
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 Sim Leisure Group is:
7.2% = RM5.4m ÷ RM75m (Based on the trailing twelve months to June 2022).
The 'return' is the yearly profit. One way to conceptualize this is that for each SGD1 of shareholders' capital it has, the company made SGD0.07 in profit.
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. 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.
Sim Leisure Group's Earnings Growth And 7.2% ROE
At first glance, Sim Leisure Group's ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 2.8% which we definitely can't overlook. But then again, seeing that Sim Leisure Group's net income shrunk at a rate of 29% in the past five years, makes us think again. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Therefore, the decline in earnings could also be the result of this.
Next, when we compared with the industry, which has shrunk its earnings at a rate of 18% in the same period, we still found Sim Leisure Group's performance to be quite bleak, because the company has been shrinking its earnings faster than the industry.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is Sim Leisure Group fairly valued compared to other companies? These 3 valuation measures might help you decide.