Yahoo Finance Keywords Studios plc's (LON:KWS) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?
Keywords Studios (LON:KWS) has had a rough three months with its share price down 30%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Keywords Studios' 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for Keywords Studios
How Is ROE Calculated?
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 Keywords Studios is:
3.3% = €20m ÷ €599m (Based on the trailing twelve months to December 2023).
The 'return' is the income the business earned over the last year. That means that for every £1 worth of shareholders' equity, the company generated £0.03 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. 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 Keywords Studios' Earnings Growth And 3.3% ROE
As you can see, Keywords Studios' ROE looks pretty weak. Even compared to the average industry ROE of 14%, the company's ROE is quite dismal. Despite this, surprisingly, Keywords Studios saw an exceptional 24% net income growth over the past five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.
As a next step, we compared Keywords Studios' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 16%.
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 Keywords Studios fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Keywords Studios Using Its Retained Earnings Effectively?
Keywords Studios has a really low three-year median payout ratio of 4.6%, meaning that it has the remaining 95% left over to reinvest into its business. So it looks like Keywords Studios is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Moreover, Keywords Studios is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 2.2% over the next three years. As a result, the expected drop in Keywords Studios' payout ratio explains the anticipated rise in the company's future ROE to 18%, over the same period.
Conclusion
On the whole, we do feel that Keywords Studios has some positive attributes. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings 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.
