The SSE (LON:SSE) share price has increased by a significant 16% over the past three months. However, since it is ultimately a company's long-term financial performance that determines market outcomes, we decided to focus on its weak fundamentals in this article. In particular, I would like to pay attention to SSE's ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder as it indicates how effectively their capital is being reinvested. More simply, it measures a company's profitability in relation to shareholder equity.
Check out our latest analysis for SSE.
How do I calculate return on equity?
of Calculation formula for return on equity teeth:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
So, based on the above formula, SSE's ROE is:
6.8% = GBP 726 million ÷ GBP 11 billion (based on the trailing twelve months to September 2023).
“Return” is the profit over the past 12 months. This means that for every £1 a shareholder invests, the company generates £0.07 in profit for him.
What is the relationship between ROE and profit growth rate?
So far, we have learned that ROE is a measure of a company's profitability. Now we need to evaluate how much profit the company reinvests or “retains” for future growth, which gives us an idea about the company's growth potential. Assuming everything else remains constant, the higher the ROE and profit retention, the higher the company's growth rate compared to companies that don't necessarily have these characteristics.
SSE's revenue growth and ROE 6.8%
At first glance, SSE's ROE does not look very promising. We then compared our company's ROE with the broader industry and were disappointed to find that the ROE is lower than the industry average of 10%. Therefore, SSE's flat returns over the past five years are likely a result of his low ROE.
We then compared SSE's net income growth rate with the industry and found that the company's growth rate is lower than the industry average growth rate of 15% over the same five-year period, which is a bit concerning.
Earnings growth is a big factor in stock valuation. In any case, investors should seek to determine whether expected earnings growth or decline has been factored in. Doing so will help you determine whether a stock's future is promising or ominous. 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 outlook. So it may be worth checking whether SSE is trading on a higher or lower P/E relative to its industry.
Is SSE effectively utilizing its retained earnings?
SSE's high three-year median payout ratio of 52% (meaning the company retains only 48% of its profits) means that the company's earnings growth is modest as a result of it distributing a large portion of its profits. suggests that it was.
Furthermore, SSE has been paying dividends for at least a decade, suggesting that management must have known that shareholders wanted dividends more than profit growth. According to our latest analyst data, the company's future payout ratio over the next three years is expected to be around 43%. In any case, although we don't expect much change in SSE's payout ratio, we expect his ROE to rise to his 15% in the future.
summary
In total, you should think twice before deciding on any investment action regarding SSE. The company hasn't been reinvesting much in its business, and given its low ROE, it's no surprise that its earnings are not growing or growing at all. That said, the latest analyst forecasts suggest that the company's revenue will continue to grow. Are these analyst forecasts based on broader expectations for the industry, or are they based on the company's fundamentals? Click here to be taken to our analyst forecasts page for the company .
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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
