Fintel Plc's (LON:FNTL) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

Fintel (LON:FNTL) has had a rough three months with its share price down 6.0%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Fintel's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Fintel

How To Calculate Return On Equity?

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 Fintel is:

18% = UK£16m ÷ UK£89m (Based on the trailing twelve months to December 2021).

The 'return' is the yearly profit. That means that for every £1 worth of shareholders' equity, the company generated £0.18 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Fintel's Earnings Growth And 18% ROE

To begin with, Fintel seems to have a respectable ROE. Especially when compared to the industry average of 14% the company's ROE looks pretty impressive. This certainly adds some context to Fintel's exceptional 32% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Fintel's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 0.6%.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is FNTL worth today? The intrinsic value infographic in our free research report helps visualize whether FNTL is currently mispriced by the market.

Is Fintel Making Efficient Use Of Its Profits?

The three-year median payout ratio for Fintel is 39%, which is moderately low. The company is retaining the remaining 61%. By the looks of it, the dividend is well covered and Fintel is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Fintel has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 26% over the next three years. However, Fintel's future ROE is expected to decline to 12% despite the expected decline in its payout ratio. We infer that there could be other factors that could be steering the foreseen decline in the company's ROE.

Conclusion

Overall, we are quite pleased with Fintel'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. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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.

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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.