EBOS Group Limited's (NZSE:EBO) Stock Been Rising: Are Strong Financials Guiding The Market?

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EBOS Group’s (NZSE:EBO) stock up by 3.5% over the past month. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. Specifically, we decided to study EBOS 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for EBOS Group

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for EBOS Group is:

13% = AU$173m ÷ AU$1.4b (Based on the trailing twelve months to December 2020).

The ‘return’ is the yearly profit. That means that for every NZ$1 worth of shareholders’ equity, the company generated NZ$0.13 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

EBOS Group’s Earnings Growth And 13% ROE

To begin with, EBOS Group seems to have a respectable ROE. Even when compared to the industry average of 13% the company’s ROE looks quite decent. Consequently, this likely laid the ground for the decent growth of 8.0% seen over the past five years by EBOS Group.

We then performed a comparison between EBOS Group’s net income growth with the industry, which revealed that the company’s growth is similar to the average industry growth of 8.0% in the same period.

past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. What is EBO worth today? The intrinsic value infographic in our free research report helps visualize whether EBO is currently mispriced by the market.

Is EBOS Group Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 73% (or a retention ratio of 27%) for EBOS Group suggests that the company’s growth wasn’t really hampered despite it returning most of its income to its shareholders.

Besides, EBOS 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 70%. Accordingly, forecasts suggest that EBOS Group’s future ROE will be 15% which is again, similar to the current ROE.

Conclusion

Overall, we are quite pleased with EBOS Group’s performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that’s probably a good sign. We also studied the latest analyst forecasts and found that the company’s earnings growth is expected be similar to its current growth rate. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company.

This article by Simply Wall St is general in nature. 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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