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EMIS Group plc's (LON:EMIS) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

It is hard to get excited after looking at EMIS Group's (LON:EMIS) recent performance, when its stock has declined 8.1% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study EMIS Group's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for EMIS Group

How Do You Calculate Return On Equity?

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 EMIS Group is:

24% = UK£29m ÷ UK£121m (Based on the trailing twelve months to June 2021).

The 'return' is the yearly profit. That means that for every £1 worth of shareholders' equity, the company generated £0.24 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of EMIS Group's Earnings Growth And 24% ROE

First thing first, we like that EMIS Group has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 13% which is quite remarkable. Under the circumstances, EMIS Group's considerable five year net income growth of 22% was to be expected.

Next, on comparing with the industry net income growth, we found that EMIS Group's growth is quite high when compared to the industry average growth of 13% in the same period, which is great to see.

past-earnings-growth
past-earnings-growth

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is EMIS fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is EMIS Group Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 82% (implying that it keeps only 18% of profits) for EMIS Group suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Besides, EMIS 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 drop to 64% over the next three years. As a result, the expected drop in EMIS Group's payout ratio explains the anticipated rise in the company's future ROE to 29%, over the same period.

Summary

On the whole, we feel that EMIS Group's performance has been quite good. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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