Should Weakness in FOS Capital Limited's (ASX:FOS) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

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

Fri, May 16, 2025, 2:02 PM 4 min read

With its stock down 12% over the past three months, it is easy to disregard FOS Capital (ASX:FOS). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to FOS Capital'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.

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How Do You Calculate Return On Equity?

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 FOS Capital is:

13% = AU$1.3m ÷ AU$10m (Based on the trailing twelve months to December 2024).

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$0.13.

Check out our latest analysis for FOS Capital

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.

A Side By Side comparison of FOS Capital's Earnings Growth And 13% ROE

To start with, FOS Capital's ROE looks acceptable. Be that as it may, the company's ROE is still quite lower than the industry average of 20%. FOS Capital was still able to see a decent net income growth of 20% over the past five years. So, there might be other aspects that are positively influencing earnings growth. Such as - high earnings retention or an efficient management in place. However, not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. So this also does lend some color to the fairly high earnings growth seen by the company.

As a next step, we compared FOS Capital's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 30% in the same period.

past-earnings-growth — ASX:FOS Past Earnings Growth May 16th 2025

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. 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 FOS Capital is trading on a high P/E or a low P/E, relative to its industry.

Is FOS Capital Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 56% (or a retention ratio of 44%) for FOS Capital suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, FOS Capital is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend.

Conclusion

In total, it does look like FOS Capital has some positive aspects to its business. Its earnings have grown respectably as we saw earlier, which was likely achieved by the company reinvesting its earnings at a decent rate of return. Still, its earnings retention is quite low, so we wonder if the company's growth could be higher, were it to pay out less dividends and retain more of its profits? So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on FOS Capital and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.