1 day Ago By Simply Wall St.
Most readers would already be aware that Fleetwood's (ASX:FWD) stock increased significantly by 33% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Particularly, we will be paying attention to ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity. The is: Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity So, based on the above formula, the ROE for Fleetwood is: 2.
3% = AU$3.8m ÷ AU$165m (Based on the trailing twelve months to June 2024). The 'return' is the yearly profit.
So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.02. 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. It is quite clear that Fleetwood's ROE is rather low.
Not just that, even compared to the industry average of 14%, the company's ROE is entirely unremarkable. Therefore, it might not be wrong to say that the five year net income decline of 18% seen by Fleetwood was possibly a result of it having a lower ROE. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects.
For instance, the company has a very high payout ratio, or is faced with competitive pressures. As a next step, we compared Fleetwood's performance with the industry and found thatFleetwood's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 5.0% in the same period, which is a slower than the company.
Earnings growth is an important metric to consider when valuing a stock. 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.
One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to , relative to its industry. In spite of a normal three-year median payout ratio of 33% (that is, a retention ratio of 67%), the fact that Fleetwood's earnings have shrunk is quite puzzling.
So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds. Additionally, Fleetwood 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.
Our latest analyst data shows that the future payout ratio of the company is expected to rise to 93% over the next three years. Still, forecasts suggest that Fleetwood's future ROE will rise to 14% even though the the company's payout ratio is expected to rise. We presume that there could some other characteristics of the business that could be driving the anticipated growth in the company's ROE.
On the whole, we feel that the performance shown by Fleetwood can be open to many interpretations. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. 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.
Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals?.
