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System1 Group (LON:SYS1) has had a rough month with its share price down 1.6%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study System1 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.
See our latest analysis for System1 Group
How To 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 System1 Group is:
26% = UK£3.2m ÷ UK£12m (Based on the trailing twelve months to September 2024).
The 'return' is the yearly profit. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.26.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
System1 Group's Earnings Growth And 26% ROE
Firstly, we acknowledge that System1 Group has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 10% also doesn't go unnoticed by us. So, the substantial 27% net income growth seen by System1 Group over the past five years isn't overly surprising.
As a next step, we compared System1 Group's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 30% in the same period.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about System1 Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.