In This Article:
System1 Group (LON:SYS1) has had a great run on the share market with its stock up by a significant 57% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to System1 Group's ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for System1 Group
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 System1 Group is:
19% = UK£2.0m ÷ UK£11m (Based on the trailing twelve months to March 2024).
The 'return' is the income the business earned over the last year. That means that for every £1 worth of shareholders' equity, the company generated £0.19 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
System1 Group's Earnings Growth And 19% ROE
To start with, System1 Group's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 8.3%. Probably as a result of this, System1 Group was able to see a decent growth of 7.8% over the last five years.
We then compared System1 Group's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 21% in the same 5-year period, which is a bit concerning.
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. 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.
Is System1 Group Using Its Retained Earnings Effectively?
With a three-year median payout ratio of 31% (implying that the company retains 69% of its profits), it seems that System1 Group is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.