4imprint Group plc's (LON:FOUR) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Most readers would already be aware that 4imprint Group's (LON:FOUR) stock increased significantly by 26% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study 4imprint 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 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 4imprint 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 4imprint Group is:

68% = US$43m ÷ US$63m (Based on the trailing twelve months to December 2019).

The 'return' is the profit over the last twelve months. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.68.

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. 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.

4imprint Group's Earnings Growth And 68% ROE

To begin with, 4imprint Group has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 7.0% also doesn't go unnoticed by us. Probably as a result of this, 4imprint Group was able to see a decent net income growth of 17% over the last five years.

Next, on comparing with the industry net income growth, we found that 4imprint Group's growth is quite high when compared to the industry average growth of 13% in the same period, which is great to see.

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about 4imprint Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is 4imprint Group Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 56% (or a retention ratio of 44%) for 4imprint Group suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 54% of its profits over the next three years. However, 4imprint Group's future ROE is expected to decline to 35% despite there being not much change anticipated in the company's payout ratio.

Summary

In total, we are pretty happy with 4imprint 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. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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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