Are Robust Financials Driving The Recent Rally In Keller Group plc's (LON:KLR) Stock?

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

Tue, Aug 20, 2024, 7:45 AM 4 min read

Keller Group (LON:KLR) has had a great run on the share market with its stock up by a significant 21% 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. Specifically, we decided to study Keller 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Keller 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 Keller Group is:

23% = UK£126m ÷ UK£555m (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. That means that for every £1 worth of shareholders' equity, the company generated £0.23 in profit.

Why Is ROE Important For 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 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.

Keller Group's Earnings Growth And 23% ROE

First thing first, we like that Keller Group has an impressive ROE. Secondly, even when compared to the industry average of 10% the company's ROE is quite impressive. As a result, Keller Group's exceptional 37% net income growth seen over the past five years, doesn't come as a surprise.

Next, on comparing with the industry net income growth, we found that Keller Group's growth is quite high when compared to the industry average growth of 15% in the same period, which is great to see.

past-earnings-growth — LSE:KLR Past Earnings Growth August 20th 2024

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for KLR? You can find out in our latest intrinsic value infographic research report.

Is Keller Group Using Its Retained Earnings Effectively?

Keller Group's three-year median payout ratio is a pretty moderate 46%, meaning the company retains 54% of its income. By the looks of it, the dividend is well covered and Keller Group is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, Keller Group is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 27% over the next three years. Regardless, the future ROE for Keller Group is predicted to decline to 18% despite the anticipated decrease in the payout ratio. We reckon that there could probably be other factors that could be driving the forseen decline in the company's ROE.

Conclusion

Overall, we are quite pleased with Keller Group's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.