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Sun Country Airlines Holdings' (NASDAQ:SNCY) stock is up by a considerable 18% over the past 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. Particularly, we will be paying attention to Sun Country Airlines Holdings' ROE today.
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.
View our latest analysis for Sun Country Airlines Holdings
How To Calculate Return On Equity?
ROE 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 Sun Country Airlines Holdings is:
14% = US$72m ÷ US$514m (Based on the trailing twelve months to December 2023).
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 $0.14 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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
Sun Country Airlines Holdings' Earnings Growth And 14% ROE
To start with, Sun Country Airlines Holdings' ROE looks acceptable. Further, the company's ROE is similar to the industry average of 14%. Consequently, this likely laid the ground for the decent growth of 15% seen over the past five years by Sun Country Airlines Holdings.
As a next step, we compared Sun Country Airlines Holdings' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 4.6%.
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). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Sun Country Airlines Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.