Yahoo Finance Can Mixed Fundamentals Have A Negative Impact on Lok'nStore Group Plc (LON:LOK) Current Share Price Momentum?
Lok'nStore Group (LON:LOK) has had a great run on the share market with its stock up by a significant 15% over the last three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. In this article, we decided to focus on Lok'nStore Group's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for Lok'nStore Group
How Do You Calculate Return On Equity?
Return on equity 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 Lok'nStore Group is:
2.6% = UK£3.1m ÷ UK£117m (Based on the trailing twelve months to January 2020).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.03 in profit.
What Has ROE Got To Do With 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 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 Lok'nStore Group's Earnings Growth And 2.6% ROE
As you can see, Lok'nStore Group's ROE looks pretty weak. Even when compared to the industry average of 7.2%, the ROE figure is pretty disappointing. Lok'nStore Group was still able to see a decent net income growth of 7.8% over the past five years. Therefore, the growth in earnings could probably have been caused by other variables. Such as - high earnings retention or an efficient management in place.
Next, on comparing with the industry net income growth, we found that Lok'nStore Group's growth is quite high when compared to the industry average growth of 4.3% in the same period, which is great to see.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Lok'nStore Group fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Lok'nStore Group Efficiently Re-investing Its Profits?
The high three-year median payout ratio of 96% (or a retention ratio of 3.6%) for Lok'nStore Group suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Moreover, Lok'nStore Group 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 102%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 3.1%.
Summary
On the whole, we feel that the performance shown by Lok'nStore Group can be open to many interpretations. Although the company has shown a pretty impressive growth in earnings, yet the low ROE and the low rate of reinvestment makes us skeptical about the continuity of that growth, especially when or if the business comes to face any threats. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.
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