Sim Leisure Group's (Catalist:URR) stock up by 2.7% over the past month. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Sim Leisure Group'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. 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 Sim Leisure Group

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Sim Leisure Group is:

29% = RM28m ÷ RM95m (Based on the trailing twelve months to June 2023).

The 'return' is the income the business earned over the last year. That means that for every SGD1 worth of shareholders' equity, the company generated SGD0.29 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Sim Leisure Group's Earnings Growth And 29% ROE

Firstly, we acknowledge that Sim Leisure Group has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 6.4% also doesn't go unnoticed by us. Under the circumstances, Sim Leisure Group's considerable five year net income growth of 37% was to be expected.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Sim Leisure Group compares quite favourably to the industry average, which shows a decline of 8.5% over the last few years.

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. If you're wondering about Sim Leisure Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Sim Leisure Group Making Efficient Use Of Its Profits?

Sim Leisure Group has a three-year median payout ratio of 37% (where it is retaining 63% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Sim Leisure Group is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

While Sim Leisure Group has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.

Conclusion

On the whole, we feel that Sim Leisure Group's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard would have the 4 risks we have identified for Sim Leisure Group.

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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.