SPAR Group, Inc.’s (NASDAQ: SGRP) fundamentals look pretty strong: Could the market be wrong about the stock?


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It’s hard to get excited after looking at the recent performance of SPAR Group (NASDAQ: SGRP), as its stock has fallen 20% in the past three months. But if you pay close attention to it, you might understand that its strong financial data could mean that the stock could potentially see its value rise in the long run, given how the markets typically reward companies with good health. financial. In particular, we will pay special attention to the ROE of SPAR Group today.

Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In simpler terms, it measures a company’s profitability relative to equity.

How is the ROE calculated?

The return on equity formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

Thus, based on the above formula, the ROE of the SPAR Group is:

23% = US $ 9.3 million ÷ US $ 41 million (based on the last twelve months to September 2021).

The “return” is the amount earned after tax over the past twelve months. This means that for every dollar in shareholders’ equity, the company generated $ 0.23 in profit.

Why is ROE important for profit growth?

So far, we’ve learned that ROE measures how efficiently a business generates profits. We now need to assess how much profit the company is reinvesting or “holding back” for future growth, which then gives us an idea of ​​the growth potential of the company. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.

SPAR Group profit growth and 23% ROE

First of all, we love that SPAR Group has an impressive ROE. Second, a comparison with the industry-reported average ROE of 15% doesn’t go unnoticed for us either. Thus, the substantial growth of 51% in net income recorded by SPAR Group over the past five years is not too surprising.

We then compared the net income growth of SPAR Group with the industry and we are happy to see that the growth number of the company is higher compared to the industry which has a growth rate of 7.5. % during the same period.

past profit growthNasdaqCM: SGRP Past Profit Growth on November 23, 2021

Profit growth is an important metric to consider when valuing a stock. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are waiting for them. A 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 outlook. So, you might want to check whether SPAR Group is trading high P / E or low P / E, relative to its industry.

Does the SPAR Group use its profits effectively?

The SPAR Group does not pay any dividends to its shareholders, which means that the company has reinvested all of its profits in the company. This is probably what explains the high number of profit growth discussed above.

Conclusion

All in all, we are quite satisfied with the performance of SPAR Group. In particular, we like the fact that the company is reinvesting heavily in its business, and at a high rate of return. Unsurprisingly, this led to impressive profit growth. If the company continues to grow earnings like it has, it could have a positive impact on its stock price given the influence of earnings per share on long-term stock prices. Let’s not forget that trading risk is also one of the factors that affect the stock price. So this is also an important area that investors should pay attention to before making a decision on a business. To find out about the 3 risks we have identified for SPAR Group, visit our risk dashboard free of charge.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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