With its stock down 25% over the past three months, it is easy to disregard Personal Group Holdings (LON:PGH). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Personal Group Holdings’ ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
View our latest analysis for Personal Group Holdings
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Personal Group Holdings is:
23% = UK£8.8m ÷ UK£38m (Based on the trailing twelve months to December 2019).
The ‘return’ is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each £1 of shareholders’ capital it has, the company made £0.23 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we’ve learnt that ROE is a measure of a company’s profitability. 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.
Personal Group Holdings’ Earnings Growth And 23% ROE
First thing first, we like that Personal Group Holdings has an impressive ROE. Secondly, even when compared to the industry average of 13% the company’s ROE is quite impressive. Needless to say, we are quite surprised to see that Personal Group Holdings’ net income shrunk at a rate of 2.0% over the past five years. Based on this, we feel that there might be other reasons which haven’t been discussed so far in this article that could be hampering the company’s growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.
That being said, we compared Personal Group Holdings’ performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 13% in the same period.
AIM:PGH Past Earnings Growth April 23rd 2020
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Personal Group Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Personal Group Holdings Using Its Retained Earnings Effectively?
With a high three-year median payout ratio of 82% (implying that 18% of the profits are retained), most of Personal Group Holdings’ profits are being paid to shareholders, which explains the company’s shrinking earnings. With only very little left to reinvest into the business, growth in earnings is far from likely. Our risks dashboard should have the 2 risks we have identified for Personal Group Holdings.
Moreover, Personal Group Holdings has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.
Summary
On the whole, we do feel that Personal Group Holdings has some positive attributes. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits.
So far, we’ve only made a quick discussion around the company’s earnings growth. To gain further insights into Personal Group Holdings’ past profit growth, check out this visualization of past earnings, revenue and cash flows.
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