It is hard to get excited after looking at Segue Group’s (TSE:3968) recent performance, when its stock has declined 15% over the past month. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Segue Group’s ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
See our latest analysis for Segue 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 Segue Group is:
20% = JP¥699m ÷ JP¥3.5b (Based on the trailing twelve months to June 2024).
The ‘return’ is the income the business earned over the last year. So, this means that for every ¥1 of its shareholder’s investments, the company generates a profit of ¥0.20.
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.
Segue Group’s Earnings Growth And 20% ROE
To begin with, Segue Group seems to have a respectable ROE. On comparing with the average industry ROE of 13% the company’s ROE looks pretty remarkable. This certainly adds some context to Segue Group’s decent 15% net income growth seen over the past five years.
We then performed a comparison between Segue Group’s net income growth with the industry, which revealed that the company’s growth is similar to the average industry growth of 14% in the same 5-year 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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you’re wondering about Segue Group’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Segue Group Using Its Retained Earnings Effectively?
Segue Group has a healthy combination of a moderate three-year median payout ratio of 37% (or a retention ratio of 63%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.
Additionally, Segue Group has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders.
Conclusion
Overall, we are quite pleased with Segue 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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. To know the 2 risks we have identified for Segue Group visit our risks dashboard for free.
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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.
