Supply Network (ASX:SNL) has had a great run on the market share with its stock up by a significant 19% 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. Particularly, we will be paying attention to Supply Network’s ROE today.
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 Supply Network
How Do You Calculate Return On Equity?
Return on equity 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 Supply Network is:
34% = AU$23m ÷ AU$68m (Based on the trailing twelve months to December 2022).
The ‘return’ is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each A$1 of shareholders’ capital it has, the company made A$0.34 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. 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 Supply Network’s Earnings Growth And 34% ROE
To begin with, Supply Network has a pretty high ROE which is interesting. Additionally, the company’s ROE is higher compared to the industry average of 8.9% which is quite remarkable. So, the substantial 24% net income growth seen by the Supply Network over the past five years isn’t too surprising.
Next, on comparing with the industry net income growth, we found that Supply Network’s growth is quite high when compared to the industry average growth of 16% in the same period, which is great to see.
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. Doing so will help them establish if the stock’s future looks promising or ominous. Is SNL fairly valued? This infographic on the company’s intrinsic value has everything you need to know.
Is the Supply Network Efficiently Re-investing Its Profits?
Supply Network’s significant three-year median payout ratio of 64% (where it is retaining only 36% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.
Additionally, Supply Network has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts’ consensus data, we found that the company is expected to keep paying out approximately 67% of its profits over the next three years. As a result, Supply Network’s ROE is not expected to change by much either, which we inferred from the analyst estimate of 36% for future ROE.
Summary
Overall, we are quite pleased with Supply Network’s performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that’s not too bad. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.
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