Do Its Financials Have Any Role To Play In Driving SNC-Lavalin Group Inc.'s (TSE:SNC) Stock Up Recently?
Most readers would already be aware that SNC-Lavalin Group's (TSE:SNC) stock increased significantly by 29% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to SNC-Lavalin Group's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for SNC-Lavalin Group
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 SNC-Lavalin Group is:
1.9% = CA$57m ÷ CA$3.0b (Based on the trailing twelve months to September 2022).
The 'return' is the income the business earned over the last year. So, this means that for every CA$1 of its shareholder's investments, the company generates a profit of CA$0.02.
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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
SNC-Lavalin Group's Earnings Growth And 1.9% ROE
It is hard to argue that SNC-Lavalin Group's ROE is much good in and of itself. Even when compared to the industry average of 6.0%, the ROE figure is pretty disappointing. Although, we can see that SNC-Lavalin Group saw a modest net income growth of 7.1% over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
As a next step, we compared SNC-Lavalin Group'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 7.0% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. What is SNC worth today? The intrinsic value infographic in our free research report helps visualize whether SNC is currently mispriced by the market.
Is SNC-Lavalin Group Making Efficient Use Of Its Profits?
In SNC-Lavalin Group's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 0.6% (or a retention ratio of 99%), which suggests that the company is investing most of its profits to grow its business.
Besides, SNC-Lavalin Group has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 4.4% over the next three years. Regardless, the future ROE for SNC-Lavalin Group is speculated to rise to 12% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.
On the whole, we do feel that SNC-Lavalin Group has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. 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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