Advertisement
UK markets open in 3 hours 48 minutes

  • NIKKEI 225

    38,329.39
    +777.23 (+2.07%)
     

  • HANG SENG

    17,142.18
    +313.25 (+1.86%)
     

  • CRUDE OIL

    83.32
    -0.04 (-0.05%)
     

  • GOLD FUTURES

    2,334.50
    -7.60 (-0.32%)
     

  • DOW

    38,503.69
    +263.71 (+0.69%)
     

  • Bitcoin GBP

    53,508.80
    -106.13 (-0.20%)
     

  • CMC Crypto 200

    1,433.77
    +19.01 (+1.34%)
     

  • NASDAQ Composite

    15,696.64
    +245.33 (+1.59%)
     

  • UK FTSE All Share

    4,378.75
    +16.15 (+0.37%)
     
Money:

What is the true cost of the UK state pension?

To get a sense of the true value of the state pension, you can look at how much you would need to save to match it yourself

Do Its Financials Have Any Role To Play In Driving REACT Group plc's (LON:REAT) Stock Up Recently?

Simply Wall St
·4-min read

Most readers would already be aware that REACT Group's (LON:REAT) stock increased significantly by 28% over the past 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. In this article, we decided to focus on REACT Group's ROE.

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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for REACT Group

How Do You Calculate Return On Equity?

The formula for ROE is:

ADVERTISEMENT

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for REACT Group is:

8.6% = UK£188k ÷ UK£2.2m (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.09 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of REACT Group's Earnings Growth And 8.6% ROE

At first glance, REACT Group's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 9.2%, we may spare it some thought. Particularly, the exceptional 46% net income growth seen by REACT Group over the past five years is pretty remarkable. Considering the moderately low ROE, it is quite possible that there might be some 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.

As a next step, we compared REACT Group's 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 11%.

past-earnings-growth
past-earnings-growth

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. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if REACT Group is trading on a high P/E or a low P/E, relative to its industry.

Is REACT Group Making Efficient Use Of Its Profits?

Summary

In total, it does look like REACT Group has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 3 risks we have identified for REACT Group by visiting our risks dashboard for free on our platform here.

This article by Simply Wall St is general in nature. 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 (at) simplywallst.com.