Is Personal Group Holdings Plc's (LON:PGH) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

editorial-team@simplywallst.com (Simply Wall St)

Thu, Apr 24, 2025, 1:01 AM 4 min read

Most readers would already be aware that Personal Group Holdings' (LON:PGH) stock increased significantly by 36% over the past 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. In this article, we decided to focus on Personal Group Holdings' ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Personal Group Holdings is:

16% = UK£5.5m ÷ UK£35m (Based on the trailing twelve months to December 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.16 in profit.

See our latest analysis for Personal Group Holdings

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Personal Group Holdings' Earnings Growth And 16% ROE

At first glance, Personal Group Holdings seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 13%. For this reason, Personal Group Holdings' five year net income decline of 33% raises the question as to why the decent ROE didn't translate into growth. So, there might be some other aspects that could explain this. These include low earnings retention or poor allocation of capital.

Next, when we compared with the industry, which has shrunk its earnings at a rate of 8.2% in the same 5-year period, we still found Personal Group Holdings' performance to be quite bleak, because the company has been shrinking its earnings faster than the industry.

past-earnings-growth — AIM:PGH Past Earnings Growth April 24th 2025

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. If you're wondering about Personal Group Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Personal Group Holdings Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 85% (implying that 15% of the profits are retained), most of Personal Group Holdings' profits are being paid to shareholders, which explains the company's shrinking earnings. With only very little left to reinvest into the business, growth in earnings is far from likely.

Additionally, Personal Group Holdings has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 78%.

Conclusion

Overall, we feel that Personal Group Holdings certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.