New Work SE's (ETR:NWO) Stock Is Going Strong: Is the Market Following Fundamentals?

New Work (ETR:NWO) has had a great run on the share market with its stock up by a significant 9.8% over the last week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study New Work’s ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company’s success at turning shareholder investments into profits.

See our latest analysis for New Work

How To 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 New Work is:

29% = €37m ÷ €125m (Based on the trailing twelve months to June 2022).

The ‘return’ is the amount earned after tax over the last twelve months. That means that for every €1 worth of shareholders’ equity, the company generated €0.29 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. 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. 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.

New Work’s Earnings Growth And 29% ROE

First thing first, we like that New Work has an impressive ROE. Additionally, the company’s ROE is higher compared to the industry average of 17% which is quite remarkable. Probably as a result of this, New Work was able to see a decent net income growth of 7.0% over the last five years.

Next, on comparing with the industry net income growth, we found that the growth figure reported by New Work compares quite favourably to the industry average, which shows a decline of 2.0% in the same period.

past-earnings-growth

Earnings growth is a huge factor in stock valuation. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if New Work is trading on a high P/E or a low P/E, relative to its industry.

Is New Work Using Its Retained Earnings Effectively?

New Work has a three-year median payout ratio of 40%, which implies that it retains the remaining 60% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Moreover, New Work is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts’ consensus data, we found that the company is expected to keep paying out approximately 35% of its profits over the next three years. As a result, New Work’s ROE is not expected to change by much either, which we inferred from the analyst estimate of 32% for future ROE.

Conclusion

In total, we are pretty happy with New Work’s performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company’s earnings are expected to gain momentum. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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