SG Fleet Group Limited's (ASX:SGF) Stock Is Going Strong: Have Financials A Role To Play?

Simply Wall St

Mon, Nov 2, 2020, 7:26 PM 4 min read

SG Fleet Group's (ASX:SGF) stock is up by a considerable 12% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study SG Fleet Group's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for SG Fleet 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 SG Fleet Group is:

14% = AU$37m ÷ AU$271m (Based on the trailing twelve months to June 2020).

The 'return' refers to a company's earnings over the last year. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.14.

What Has ROE Got To Do With 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. 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.

SG Fleet Group's Earnings Growth And 14% ROE

At first glance, SG Fleet Group seems to have a decent ROE. Even when compared to the industry average of 14% the company's ROE looks quite decent. SG Fleet Group's decent returns aren't reflected in SG Fleet Group'smediocre five year net income growth average of 4.5%. A few likely reasons that could be keeping earnings growth low are - the company has a high payout ratio or the business has allocated capital poorly, for instance.

Next, on comparing SG Fleet Group's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 4.5% in the same period.

past-earnings-growth — ASX:SGF Past Earnings Growth November 3rd 2020

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 SGF? You can find out in our latest intrinsic value infographic research report.

Is SG Fleet Group Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 71% (or a retention ratio of 29%), most of SG Fleet Group's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

In addition, SG Fleet Group has been paying dividends over a period of six years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 83%. Regardless, the future ROE for SG Fleet Group is predicted to rise to 19% despite there being not much change expected in its payout ratio.

Conclusion

In total, it does look like SG Fleet Group has some positive aspects to its business. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 3 risks we have identified for SG Fleet Group.

This article by Simply Wall St is general in nature. 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.

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