Should Weakness in On the Beach Group plc's (LON:OTB) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?
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It is hard to get excited after looking at On the Beach Group's (LON:OTB) recent performance, when its stock has declined 6.3% over the past month. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study On the Beach Group's ROE in this article.
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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for On the Beach 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 On the Beach Group is:
9.3% = UK￡16m ÷ UK￡170m (Based on the trailing twelve months to March 2024).
The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every ￡1 worth of equity, the company was able to earn ￡0.09 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.
On the Beach Group's Earnings Growth And 9.3% ROE
When you first look at it, On the Beach Group's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 8.9%. Even so, On the Beach Group has shown a fairly decent growth in its net income which grew at a rate of 11%. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
As a next step, we compared On the Beach Group's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 15% in the same period.
