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Schaffer (ASX:SFC) has had a great run on the share market with its stock up by a significant 18% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Schaffer's ROE today.
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.
See our latest analysis for Schaffer
How Is ROE Calculated?
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 Schaffer is:
24% = AU$29m ÷ AU$121m (Based on the trailing twelve months to December 2019).
The 'return' is the yearly profit. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.24.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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. 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.
Schaffer's Earnings Growth And 24% ROE
First thing first, we like that Schaffer has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 6.9% which is quite remarkable. So, the substantial 44% net income growth seen by Schaffer over the past five years isn't overly surprising.
Next, on comparing with the industry net income growth, we found that Schaffer's growth is quite high when compared to the industry average growth of 16% in the same period, which is great to see.
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. Doing so will help them establish if the stock's future looks promising or ominous. What is SFC worth today? The intrinsic value infographic in our free research report helps visualize whether SFC is currently mispriced by the market.
Is Schaffer Efficiently Re-investing Its Profits?
The three-year median payout ratio for Schaffer is 42%, which is moderately low. The company is retaining the remaining 58%. By the looks of it, the dividend is well covered and Schaffer is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.