Learning Technologies Group plc (LON:LTG) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

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Simply Wall St

Tue, May 24, 2022, 12:56 AM 4 min read

It is hard to get excited after looking at Learning Technologies Group's (LON:LTG) recent performance, when its stock has declined 26% 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 Learning Technologies Group's ROE.

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.

Check out our latest analysis for Learning Technologies Group

How Do You 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 Learning Technologies Group is:

4.0% = UK£15m ÷ UK£371m (Based on the trailing twelve months to December 2021).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.04 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Learning Technologies Group's Earnings Growth And 4.0% ROE

At first glance, Learning Technologies Group's ROE doesn't look very promising. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 9.0%. In spite of this, Learning Technologies Group was able to grow its net income considerably, at a rate of 50% in the last five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.

We then compared Learning Technologies Group's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 13% in the same period.

past-earnings-growth — AIM:LTG Past Earnings Growth May 24th 2022

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. Doing so will help them establish if the stock's future looks promising or ominous. Is LTG fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Learning Technologies Group Using Its Retained Earnings Effectively?

Learning Technologies Group's three-year median payout ratio is a pretty moderate 44%, meaning the company retains 56% of its income. By the looks of it, the dividend is well covered and Learning Technologies Group is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Learning Technologies Group has paid dividends over a period of eight years which means that the company is pretty serious about sharing its profits with shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 14% over the next three years. As a result, the expected drop in Learning Technologies Group's payout ratio explains the anticipated rise in the company's future ROE to 61%, over the same period.

Summary

On the whole, we do feel that Learning Technologies Group has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.