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With its stock down 11% over the past three months, it is easy to disregard Property Franchise Group (LON:TPFG). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Property Franchise Group's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. 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 Property Franchise Group
How Is ROE Calculated?
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 Property Franchise Group is:
5.4% = UK£7.7m ÷ UK£144m (Based on the trailing twelve months to June 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 £0.05 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. 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. 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.
Property Franchise Group's Earnings Growth And 5.4% ROE
On the face of it, Property Franchise Group's ROE is not much to talk about. However, its ROE is similar to the industry average of 6.0%, so we won't completely dismiss the company. Particularly, the exceptional 22% net income growth seen by Property Franchise Group over the past five years is pretty remarkable. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as - high earnings retention or an efficient management in place.
Next, on comparing with the industry net income growth, we found that Property Franchise Group's growth is quite high when compared to the industry average growth of 3.0% in the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Property Franchise Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.