Yahoo Finance Is Spirax-Sarco Engineering plc's (LON:SPX) Recent Stock Performance Influenced By Its Fundamentals In Any Way?
Spirax-Sarco Engineering (LON:SPX) has had a great run on the share market with its stock up by a significant 12% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Spirax-Sarco Engineering'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Spirax-Sarco Engineering
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 Spirax-Sarco Engineering is:
16% = UK£184m ÷ UK£1.2b (Based on the trailing twelve months to December 2023).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.16.
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. 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.
Spirax-Sarco Engineering's Earnings Growth And 16% ROE
To start with, Spirax-Sarco Engineering's ROE looks acceptable. Further, the company's ROE is similar to the industry average of 14%. Despite this, Spirax-Sarco Engineering's five year net income growth was quite flat over the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
As a next step, we compared Spirax-Sarco Engineering'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 9.4% in the same period.
Earnings growth is an important metric to consider when valuing a stock. 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. Is Spirax-Sarco Engineering fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Spirax-Sarco Engineering Making Efficient Use Of Its Profits?
Despite having a normal three-year median payout ratio of 47% (implying that the company keeps 53% of its income) over the last three years, Spirax-Sarco Engineering has seen a negligible amount of growth in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.
Additionally, Spirax-Sarco Engineering has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 47% of its profits over the next three years. Regardless, the future ROE for Spirax-Sarco Engineering is predicted to rise to 20% despite there being not much change expected in its payout ratio.
Conclusion
On the whole, we do feel that Spirax-Sarco Engineering has some positive attributes. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return and is reinvesting ma huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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.
