News
Are the fundamentals in the driver’s seat?
Most readers will already know that Sligro Food Group (AMS:SLIGR) shares are up 5.4% in the last three months. Given that share prices are typically aligned with a company’s long-term financial performance, we decided to investigate whether the company’s decent financials had an influence on the recent price change. In particular, we will be attentive Sligro Food Group ROE today.
Return on equity or ROE is an important factor for a shareholder to consider because it indicates how effectively their capital is being reinvested. In simpler terms, it measures a company’s profitability in relation to shareholders’ equity.
Check out our latest analysis for Sligro Food Group
How do you calculate return on equity?
Return on equity can be calculated using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Equity
Therefore, based on the above formula, Sligro Food Group’s ROE is:
1.3% = €6.0m ÷ €461m (based on trailing twelve months to December 2023).
The ‘return’ is the annual profit. This means that for every €1 of equity, the company generated €0.01 in profit.
Why is ROE important for earnings growth?
We have already established that ROE serves as an efficient profit-generating indicator for a company’s future earnings. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we will then be able to assess a company’s earnings growth potential. Generally speaking, all other things being equal, companies with a high return on equity and profit retention have a higher growth rate than companies that do not share these attributes.
A side-by-side comparison of Sligro Food Group’s earnings growth and 1.3% ROE
It’s hard to argue that Sligro Food Group’s ROE is very good on its own. Even compared to the industry average ROE of 13%, the company’s ROE is quite underwhelming. Sligro Food Group has still managed to see decent net profit growth of 5.2% over the last five years. We believe that there may be other aspects that are positively influencing the growth of the company’s results. Such as – high profit retention or efficient management implemented.
Next, when comparing this to the industry’s net income growth, we found that Sligro Food Group’s reported growth was lower than the industry’s growth of 12% in recent years, which is not something we like to see.
past profit growth
The basis for adding value to a company is, to a large extent, linked to the growth of its profits. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This helps them determine whether the stock is poised for a bright or bleak future. Is Sligro Food Group fairly valued compared to other companies? Those 3 assessment measures can help you decide.
The story continues
Is Sligro Food Group making efficient use of its profits?
Sligro Food Group has a three-year average payout ratio of 44%, which implies it retains the remaining 56% of its profits. This suggests that its dividends are well covered, and given the decent growth seen by the company, it appears that management is reinvesting its profits efficiently.
Furthermore, Sligro Food Group is determined to continue sharing its profits with shareholders, which we deduce from its long history of paying dividends for at least ten years. By studying the latest analyst consensus data, we found that the company’s future payout ratio is expected to increase to 57% over the next three years. However, Sligro Food Group’s future ROE is expected to increase to 18% despite the expected increase in the company’s payout ratio. We infer that there could be other factors that could be driving the anticipated growth in the company’s ROE.
Summary
Altogether, it appears that Sligro Food Group has some positive aspects to its business. Specifically, its rather high earnings growth number, which was no doubt supported by the company’s high profit retention. Still, the low ROE means that all that reinvestment isn’t bringing much benefit to investors. Therefore, the latest analyst forecasts show that the company will continue to record an expansion in its profits. Are these analysts’ expectations based on general expectations for the industry or on the company’s fundamentals? Click here to be directed to our analysts’ forecast page for the company.
Do you have feedback on this article? Worried about the content? Get in touch with us directly. Alternatively, email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your objectives or your financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St has no position in any of the stocks mentioned.