With its stock down 34% over the past three months, it is easy to disregard S-Enjoy Service Group (HKG:1755). However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to S-Enjoy Service Group'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. Put another way, it reveals the company's success at turning shareholder investments into profits.
Check out our latest analysis for S-Enjoy Service Group
How Do You 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 S-Enjoy Service Group is:
22% = CN¥559m ÷ CN¥2.5b (Based on the trailing twelve months to December 2021).
The 'return' is the income the business earned over the last year. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.22 in profit.
What Has ROE Got To Do With 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.
A Side By Side comparison of S-Enjoy Service Group's Earnings Growth And 22% ROE
Firstly, we acknowledge that S-Enjoy Service Group has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 7.2% which is quite remarkable. As a result, S-Enjoy Service Group's exceptional 36% net income growth seen over the past five years, doesn't come as a surprise.
Next, on comparing with the industry net income growth, we found that S-Enjoy Service Group's growth is quite high when compared to the industry average growth of 8.2% in the same period, which is great to see.SEHK:1755 Past Earnings Growth April 20th 2022
Earnings growth is an important metric to consider when valuing a stock. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about S-Enjoy Service Group's's valuation , check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is S-Enjoy Service Group Efficiently Re-investing Its Profits?
S-Enjoy Service Group has a three-year median payout ratio of 42% (where it is retaining 58% of its income) which is not too low or not too high. So it seems that S-Enjoy Service Group is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.
Additionally, S-Enjoy Service Group has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 28% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 32%, over the same period.
Overall, we are quite pleased with S-Enjoy Service Group's performance. 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. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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.