New Wave Group (STO:NEWA B) stock is up 14% over the past month. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market outcomes. In this article, we decided to focus on the ROE of New Wave Group.
Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.
See our latest analysis for New Wave Group
How is ROE calculated?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for New Wave Group is:
18% = 846 million kr ÷ 4.8 billion kr (based on the last twelve months until March 2022).
“Yield” is the income the business has earned over the past year. This means that for every 1 SEK worth of equity, the company has generated 0.18 SEK of profit.
What does ROE have to do with earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
A side-by-side comparison of New Wave Group’s earnings growth and 18% ROE
For starters, New Wave Group seems to have a respectable ROE. Additionally, the company’s ROE compares quite favorably to the industry average of 15%. This likely laid the foundation for New Wave Group’s moderate 17% net income growth seen over the past five years.
Then, comparing with the industry net income growth, we found that New Wave Group’s growth is quite high compared to the industry average growth of 6.2% over the same period, which is great to see.
Earnings growth is an important factor in stock valuation. 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 then helps them determine if the stock is positioned for a bright or bleak future. If you’re wondering about New Wave Group’s valuation, check out this indicator of its price-earnings ratio, relative to its sector.
Does New Wave Group use its profits efficiently?
New Wave Group has a three-year median payout ratio of 37%, implying that it keeps the remaining 63% of its earnings. This suggests that its dividend is well covered and, given the decent growth the company has seen, it looks like management is reinvesting its earnings effectively.
Moreover, New Wave Group has paid dividends over a period of at least ten years, which means that the company is quite serious about sharing its profits with its shareholders. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 36%. As a result, New Wave Group’s ROE is not expected to change much either, which we inferred from analysts’ estimate of 18% for future ROE.
Overall, we are quite satisfied with New Wave Group’s performance. Specifically, we like that the company reinvests a large portion of its earnings at a high rate of return. This of course caused the company to see substantial growth in profits. That said, the latest forecasts from industry analysts show that the company’s earnings growth is expected to slow. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.