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Kelly Partners Group Holdings (ASX:KPG) has had a great run on the share market with its stock up by a significant 24% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Kelly Partners Group Holdings' ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Kelly Partners Group Holdings
How Is ROE Calculated?
Return on equity 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 Kelly Partners Group Holdings is:
38% = AU$8.6m ÷ AU$23m (Based on the trailing twelve months to December 2019).
The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.38 in profit.
Why Is ROE Important For 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. 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.
Kelly Partners Group Holdings' Earnings Growth And 38% ROE
Firstly, we acknowledge that Kelly Partners Group Holdings has a significantly high ROE. Secondly, even when compared to the industry average of 16% the company's ROE is quite impressive. Under the circumstances, Kelly Partners Group Holdings' considerable five year net income growth of 34% was to be expected.
Next, on comparing with the industry net income growth, we found that Kelly Partners Group Holdings' growth is quite high when compared to the industry average growth of 14% in the same period, which is great to see.
Earnings growth is an important metric to consider when valuing a stock. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Kelly Partners Group Holdings is trading on a high P/E or a low P/E, relative to its industry.