With its stock down 9.1% over the past three months, it is easy to disregard Spur (JSE:SUR). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Spur's ROE.
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. Put another way, it reveals the company's success at turning shareholder investments into profits.
How To 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 Spur is:
30% = R262m ÷ R876m (Based on the trailing twelve months to December 2024).
The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every ZAR1 worth of equity, the company was able to earn ZAR0.30 in profit.
Check out our latest analysis for Spur
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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. 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.
Spur's Earnings Growth And 30% ROE
To begin with, Spur has a pretty high ROE which is interesting. Even when compared to the industry average of 27% the company's ROE is pretty decent. Given the circumstances, the significant 27% net income growth seen by Spur over the last five years is not surprising.
We then compared Spur's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 47% in the same 5-year period, which is a bit concerning.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Spur fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Spur Using Its Retained Earnings Effectively?
The high three-year median payout ratio of 73% (implying that it keeps only 27% of profits) for Spur suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.