In This Article:
Savor (NZSE:SVR) has had a great run on the share market with its stock up by a significant 12% over the last month. 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. Specifically, we decided to study Savor's ROE in this article.
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.
See our latest analysis for Savor
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Savor is:
3.5% = NZ$650k ÷ NZ$19m (Based on the trailing twelve months to March 2024).
The 'return' is the yearly profit. That means that for every NZ$1 worth of shareholders' equity, the company generated NZ$0.03 in profit.
What Is The Relationship Between ROE And 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. 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.
Savor's Earnings Growth And 3.5% ROE
As you can see, Savor's ROE looks pretty weak. A comparison with the industry shows that the company's ROE is pretty similar to the average industry ROE of 3.5%. However, the modest 6.0% net income growth seen by Savor over the past five years is a positive sign. Given the low ROE, it is likely that there could be some other aspects that are driving this growth as well. Such as - high earnings retention or an efficient management in place.
When you consider the fact that the industry earnings have shrunk at a rate of 9.8% in the same 5-year period, the company's net income growth is pretty remarkable.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Savor fairly valued compared to other companies? These 3 valuation measures might help you decide.