Is London Security plc's (LON:LSC) Recent Performance Tethered To Its Attractive Financial Prospects?

Most readers would already know that London Security's (LON:LSC) stock increased by 1.7% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study London Security'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for London Security

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for London Security is:

14% = UK£22m ÷ UK£153m (Based on the trailing twelve months to June 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 £0.14 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. 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.

London Security's Earnings Growth And 14% ROE

To start with, London Security's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 14%. This probably goes some way in explaining London Security's moderate 7.1% growth over the past five years amongst other factors.

We then performed a comparison between London Security's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 7.1% in the same 5-year period.

AIM:LSC Past Earnings Growth January 2nd 2024

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is London Security fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is London Security Efficiently Re-investing Its Profits?

London Security has a significant three-year median payout ratio of 52%, meaning that it is left with only 48% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Additionally, London Security 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.

Summary

Overall, we are quite pleased with London Security's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on London Security and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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.