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With its stock down 12% over the past three months, it is easy to disregard Next 15 Group (LON:NFG). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Next 15 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Next 15 Group
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Next 15 Group is:
37% = UK£62m ÷ UK£170m (Based on the trailing twelve months to July 2024).
The 'return' is the yearly profit. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.37 in profit.
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. 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.
Next 15 Group's Earnings Growth And 37% ROE
To begin with, Next 15 Group has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 10% which is quite remarkable. Under the circumstances, Next 15 Group's considerable five year net income growth of 32% was to be expected.
Next, on comparing Next 15 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 30% over the last few years.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Next 15 Group fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Next 15 Group Efficiently Re-investing Its Profits?
The three-year median payout ratio for Next 15 Group is 25%, which is moderately low. The company is retaining the remaining 75%. By the looks of it, the dividend is well covered and Next 15 Group is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.