Skellerup Holdings Limited's (NZSE:SKL) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

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

Thu, Jan 16, 2025, 2:42 PM 3 min read

Most readers would already be aware that Skellerup Holdings' (NZSE:SKL) stock increased significantly by 13% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Skellerup Holdings' 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Skellerup Holdings

How To Calculate Return On Equity?

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 Skellerup Holdings is:

20% = NZ$47m ÷ NZ$229m (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. That means that for every NZ$1 worth of shareholders' equity, the company generated NZ$0.20 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. 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.

A Side By Side comparison of Skellerup Holdings' Earnings Growth And 20% ROE

To begin with, Skellerup Holdings seems to have a respectable ROE. Especially when compared to the industry average of 11% the company's ROE looks pretty impressive. This probably laid the ground for Skellerup Holdings' moderate 13% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Skellerup Holdings' reported growth was lower than the industry growth of 26% over the last few years, which is not something we like to see.

past-earnings-growth — NZSE:SKL Past Earnings Growth January 16th 2025

Earnings growth is a huge factor in stock valuation. 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 SKL worth today? The intrinsic value infographic in our free research report helps visualize whether SKL is currently mispriced by the market.

Is Skellerup Holdings Efficiently Re-investing Its Profits?

While Skellerup Holdings has a three-year median payout ratio of 85% (which means it retains 15% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Moreover, Skellerup Holdings 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 is expected to keep paying out approximately 85% of its profits over the next three years. However, Skellerup Holdings' ROE is predicted to rise to 26% despite there being no anticipated change in its payout ratio.

Conclusion

On the whole, we do feel that Skellerup Holdings has some positive attributes. Its earnings growth is decent, and the high ROE does contribute to that growth. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.