Do Its Financials Have Any Role To Play In Driving Spectra Systems Corporation's (LON:SPSY) Stock Up Recently?
Spectra Systems' (LON:SPSY) stock is up by a considerable 12% 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. Specifically, we decided to study Spectra Systems' 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. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for Spectra Systems
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 Spectra Systems is:
19% = US$4.8m ÷ US$25m (Based on the trailing twelve months to June 2022).
The 'return' refers to a company's earnings over the last year. That means that for every £1 worth of shareholders' equity, the company generated £0.19 in profit.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
Spectra Systems' Earnings Growth And 19% ROE
To start with, Spectra Systems' ROE looks acceptable. On comparing with the average industry ROE of 9.0% the company's ROE looks pretty remarkable. This certainly adds some context to Spectra Systems' decent 9.6% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that the growth figure reported by Spectra Systems compares quite favourably to the industry average, which shows a decline of 4.2% in the same period.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Spectra Systems fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Spectra Systems Efficiently Re-investing Its Profits?
Spectra Systems has a significant three-year median payout ratio of 97%, meaning that it is left with only 3.4% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.
Moreover, Spectra Systems is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 76% over the next three years.
Conclusion
In total, it does look like Spectra Systems has some positive aspects to its business. Especially the growth in earnings which was backed by an impressive ROE. Still, the high ROE could have been even more beneficial to investors had the company been reinvesting more of its profits. As highlighted earlier, the current reinvestment rate appears to be negligible. Up till now, we've only made a short study of the company's growth data. To gain further insights into Spectra Systems' past profit growth, check out this visualization of past earnings, revenue and cash flows.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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