Yahoo Finance Do Its Financials Have Any Role To Play In Driving Fuller, Smith & Turner P.L.C.'s (LON:FSTA) Stock Up Recently?
Fuller Smith & Turner (LON:FSTA) has had a great run on the share market with its stock up by a significant 24% 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. Specifically, we decided to study Fuller Smith & Turner'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. Put another way, it reveals the company's success at turning shareholder investments into profits.
Check out our latest analysis for Fuller Smith & Turner
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Fuller Smith & Turner is:
2.1% = UK£9.1m ÷ UK£431m (Based on the trailing twelve months to March 2024).
The 'return' is the amount earned after tax over the last twelve months. That means that for every £1 worth of shareholders' equity, the company generated £0.02 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.
Fuller Smith & Turner's Earnings Growth And 2.1% ROE
It is hard to argue that Fuller Smith & Turner's ROE is much good in and of itself. Even compared to the average industry ROE of 8.8%, the company's ROE is quite dismal. Although, we can see that Fuller Smith & Turner saw a modest net income growth of 11% over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.
Next, on comparing Fuller Smith & Turner's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 11% over the last few years.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Fuller Smith & Turner's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Fuller Smith & Turner Making Efficient Use Of Its Profits?
The high three-year median payout ratio of 80% (or a retention ratio of 20%) for Fuller Smith & Turner suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Moreover, Fuller Smith & Turner 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. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 54% over the next three years. The fact that the company's ROE is expected to rise to 4.4% over the same period is explained by the drop in the payout ratio.
Summary
On the whole, we do feel that Fuller Smith & Turner has some positive attributes. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion of its profits. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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
