2 Cheap Cars Group (NZSE:2CC) shares have risen 4.7% over the past week. We wonder if and what role the company’s finances play in this price change, as long-term fundamentals of a company usually determine market outcomes. Specifically, we decided to examine 2 Cheap Cars Group’s return on equity in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investments it receives from its shareholders. In simpler terms, it measures the profitability of a company relative to shareholders’ equity.
Check out our latest analysis for 2 Cheap Cars Group
How is ROE calculated?
Return on equity can be calculated using the following formula:
Return on equity = Net profit (from continuing operations) ÷ Equity
Based on the above formula, the return on equity for 2 Cheap Cars Group is:
31% = NZ$6.2 million ÷ NZ$20 million (based on the last twelve months to March 2024).
The “return” is the amount earned after taxes over the last twelve months. You can also imagine it like this: for every NZ$1 of equity, the company was able to generate NZ$0.31 in profit.
What is the relationship between ROE and earnings growth?
So far, we’ve learned that return on equity is a measure of a company’s profitability. Now we need to evaluate how much profit the company reinvests or “retains” for future growth, which then gives us an idea of the company’s growth potential. Assuming everything else remains unchanged, the higher the return on equity and retention of profit, the higher a company’s growth rate will be compared to companies that don’t necessarily have these characteristics.
A side-by-side comparison of earnings growth and 31% return on equity for 2 Cheap Cars Groups
First of all, we like that 2 Cheap Cars Group has an impressive return on equity. Second, the company’s return on equity itself is quite impressive when compared to the industry average of 19%. However, we are curious how the high returns have nevertheless led to 2 Cheap Cars Group’s stagnant growth over the past five years. So, there could be other aspects that are potentially hindering the company’s growth. For example, the company is paying out a large portion of its earnings as dividends or is facing competitive pressures.
Next, when comparing it to industry net income growth, we found that 2 Cheap Cars Group’s reported growth was below the industry growth of 1.3% over the past few years, which is something we don’t like to see.
Earnings growth is an important factor in stock valuation. The investor should try to determine if the expected earnings growth or expected earnings decline, whichever may be the case, is built into the price. This will then help them determine if the stock is positioned for a good or bad future. If you’re wondering about 2 Cheap Cars Group’s valuation, check out this gauge of its price-to-earnings ratio compared to the industry.
Does the 2 Cheap Cars Group reinvest its profits efficiently?
2 Cheap Cars Group has a high three-year median payout ratio of 52% (or a retention ratio of 48%), meaning the company pays out most of its earnings to shareholders as dividends. This partly explains why there has been no earnings growth.
In addition, 2 Cheap Cars Group has paid dividends over a period of three years, which means that the company’s management is committed to paying dividends even if it means little or no earnings growth.
Diploma
Overall, it seems like there are some positives to 2 Cheap Cars Group’s business. Although the company has a high return on equity, its earnings growth is quite disappointing. This can be attributed to the fact that it only reinvests a small portion of its profits and pays out the rest as dividends. So far, we have only scratched the surface of the company’s past performance by looking at the company’s fundamentals. You can do your own research on 2 Cheap Cars Group and see how it has performed in the past by checking out this FREE article. detailed graphics of previous profits, earnings and cash flows.
Do you have feedback on this article? Are you concerned about the content? Contact us directly from us. Alternatively, send an email to editorial-team (at) simplywallst.com.
This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
