Do Its Financials Have Any Role To Play In Driving Phoenix Spree Deutschland Limited's (LON:PSDL) Stock Up Recently?

Phoenix Spree Deutschland's (LON:PSDL) stock is up by a considerable 18% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Phoenix Spree Deutschland's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Phoenix Spree Deutschland

How Is ROE Calculated?

Return on equity 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 Phoenix Spree Deutschland is:

5.7% = €24m ÷ €421m (Based on the trailing twelve months to June 2020).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.06 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned 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. 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.

Phoenix Spree Deutschland's Earnings Growth And 5.7% ROE

On the face of it, Phoenix Spree Deutschland's ROE is not much to talk about. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 7.4% either. However, the moderate 9.1% net income growth seen by Phoenix Spree Deutschland over the past five years is definitely a positive. So, there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Phoenix Spree Deutschland's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 6.6% in the same period.

past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. 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. Is Phoenix Spree Deutschland fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Phoenix Spree Deutschland Efficiently Re-investing Its Profits?

Phoenix Spree Deutschland's three-year median payout ratio to shareholders is 16% (implying that it retains 84% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Moreover, Phoenix Spree Deutschland is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend.

Conclusion

Overall, we feel that Phoenix Spree Deutschland certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 4 risks we have identified for Phoenix Spree Deutschland.

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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