Yahoo Finance Has The Weir Group PLC's (LON:WEIR) Impressive Stock Performance Got Anything to Do With Its Fundamentals?
Most readers would already be aware that Weir Group's (LON:WEIR) stock increased significantly by 9.8% over the past month. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Weir 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
View our latest analysis for Weir Group
How To Calculate Return On Equity?
ROE 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 Weir Group is:
10% = UK£173m ÷ UK£1.7b (Based on the trailing twelve months to June 2022).
The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.10 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
Weir Group's Earnings Growth And 10% ROE
To begin with, Weir Group seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 11%. Despite the modest returns, Weir Group's five year net income growth was quite low, averaging at only 4.9%. We reckon that a low growth, when returns are moderate could be the result of certain circumstances like low earnings retention or poor allocation of capital.
As a next step, we compared Weir Group's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 6.4% in the same period.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is WEIR fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Weir Group Using Its Retained Earnings Effectively?
Despite having a moderate three-year median payout ratio of 30% (implying that the company retains the remaining 70% of its income), Weir Group's earnings growth was quite low. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.
Additionally, Weir Group has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 33% of its profits over the next three years. However, Weir Group's ROE is predicted to rise to 16% despite there being no anticipated change in its payout ratio.
Conclusion
Overall, we feel that Weir Group certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return and is reinvesting ma huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.
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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.
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