Warpaint London PLC's (LON:W7L) Stock's On An Uptrend: Are Strong Financials Guiding The Market?
Warpaint London (LON:W7L) has had a great run on the share market with its stock up by a significant 45% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Warpaint London's ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Warpaint London
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 Warpaint London is:
30% = UK£14m ÷ UK£47m (Based on the trailing twelve months to December 2023).
The 'return' is the yearly profit. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.30.
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.
A Side By Side comparison of Warpaint London's Earnings Growth And 30% ROE
First thing first, we like that Warpaint London has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 6.8% also doesn't go unnoticed by us. So, the substantial 48% net income growth seen by Warpaint London over the past five years isn't overly surprising.
Given that the industry shrunk its earnings at a rate of 2.5% over the last few years, the net income growth of the company is quite impressive.
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). Doing so will help them establish if the stock's future looks promising or ominous. Is Warpaint London fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Warpaint London Efficiently Re-investing Its Profits?
The high three-year median payout ratio of 87% (implying that it keeps only 13% of profits) for Warpaint London suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.
Moreover, Warpaint London is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 48% over the next three years. Despite the lower expected payout ratio, the company's ROE is not expected to change by much.
Conclusion
Overall, we are quite pleased with Warpaint London's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. 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. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com