Yahoo Finance Are Robust Financials Driving The Recent Rally In Spirax-Sarco Engineering plc's (LON:SPX) Stock?
Most readers would already be aware that Spirax-Sarco Engineering's (LON:SPX) stock increased significantly by 14% over the past month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Spirax-Sarco Engineering's ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for Spirax-Sarco Engineering
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 Spirax-Sarco Engineering is:
22% = UK£206m ÷ UK£919m (Based on the trailing twelve months to June 2021).
The 'return' refers to a company's earnings over the last year. That means that for every £1 worth of shareholders' equity, the company generated £0.22 in profit.
Why Is ROE Important For 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.
Spirax-Sarco Engineering's Earnings Growth And 22% ROE
First thing first, we like that Spirax-Sarco Engineering has an impressive ROE. Secondly, even when compared to the industry average of 11% the company's ROE is quite impressive. This likely paved the way for the modest 9.1% net income growth seen by Spirax-Sarco Engineering over the past five years. growth
As a next step, we compared Spirax-Sarco Engineering's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 8.3% in the same period.
Earnings growth is an important metric to consider when valuing a stock. 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. Is Spirax-Sarco Engineering fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Spirax-Sarco Engineering Making Efficient Use Of Its Profits?
Spirax-Sarco Engineering has a healthy combination of a moderate three-year median payout ratio of 44% (or a retention ratio of 56%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.
Moreover, Spirax-Sarco Engineering 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 42%. As a result, Spirax-Sarco Engineering's ROE is not expected to change by much either, which we inferred from the analyst estimate of 22% for future ROE.
Summary
On the whole, we feel that Spirax-Sarco Engineering's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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.
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