Yahoo Finance Lok'nStore Group Plc's (LON:LOK) Has Been On A Rise But Financial Prospects Look Weak: Is The Stock Overpriced?
Most readers would already be aware that Lok'nStore Group's (LON:LOK) stock increased significantly by 14% over the past three months. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimatley dictates market outcomes. Particularly, we will be paying attention to Lok'nStore Group's ROE today.
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.
View our latest analysis for Lok'nStore Group
How Do You 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 Lok'nStore Group is:
2.5% = UK£3.0m ÷ UK£121m (Based on the trailing twelve months to July 2020).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.02 in profit.
What Is The Relationship Between ROE And 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. 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.
Lok'nStore Group's Earnings Growth And 2.5% ROE
It is hard to argue that Lok'nStore Group's ROE is much good in and of itself. Even compared to the average industry ROE of 6.9%, the company's ROE is quite dismal. Therefore, Lok'nStore Group's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.
As a next step, we compared Lok'nStore Group's net income growth with the industry and discovered that the company's growth is slightly less than the industry average growth of 0.7% in the same period.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Lok'nStore Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Lok'nStore Group Making Efficient Use Of Its Profits?
Lok'nStore Group has a high three-year median payout ratio of 99% (or a retention ratio of 1.1%), meaning that the company is paying most of its profits as dividends to its shareholders. This does go some way in explaining why there's been no growth in its earnings.
In addition, Lok'nStore Group has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 90%. Regardless, the future ROE for Lok'nStore Group is predicted to rise to 3.0% despite there being not much change expected in its payout ratio.
Conclusion
On the whole, Lok'nStore Group's performance is quite a big let-down. Specifically, it has shown quite an unsatisfactory performance as far as earnings growth is concerned, and a poor ROE and an equally poor rate of reinvestment seem to be the reason behind this inadequate performance. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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.
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.
