Knights Group Holdings (LON:KGH) has had a great run on the share market with its stock up by a significant 24% 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. Specifically, we decided to study Knights Group 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Knights Group Holdings is:
11% = UK£11m ÷ UK£104m (Based on the trailing twelve months to October 2024).
The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.11 in profit.
So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
Knights Group Holdings' Earnings Growth And 11% ROE
To begin with, Knights Group Holdings seems to have a respectable ROE. Yet, the fact that the company's ROE is lower than the industry average of 14% does temper our expectations. However, we are pleased to see the impressive 42% net income growth reported by Knights Group Holdings over the past five years. Therefore, there could be other causes behind this growth. For instance, the company has a low payout ratio or is being managed efficiently. Bear in mind, the company does have a respectable ROE. It is just that the industry ROE is higher. So this also does lend some color to the high earnings growth seen by the company.
We then compared Knights Group Holdings' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 13% in the same 5-year period.
AIM:KGH Past Earnings Growth April 3rd 2025
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Knights Group Holdings is trading on a high P/E or a low P/E , relative to its industry.
Is Knights Group Holdings Making Efficient Use Of Its Profits?
Knights Group Holdings' three-year median payout ratio is a pretty moderate 38%, meaning the company retains 62% of its income. By the looks of it, the dividend is well covered and Knights Group Holdings is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
Besides, Knights Group Holdings has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 20% over the next three years. As a result, the expected drop in Knights Group Holdings' payout ratio explains the anticipated rise in the company's future ROE to 16%, over the same period.
Conclusion
On the whole, we feel that Knights Group Holdings' performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.
