Spin Master (TSE:TOY) had a tough three months with its share price down 2.4%. However, the company’s fundamentals look pretty decent and long-term financial data is generally in line with future market price movements. Specifically, we decided to study Spin Master’s ROE in this article.

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

See our latest review for Spin Master

How is ROE calculated?

ROE can be calculated using the formula:

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

So, based on the above formula, the ROE for Spin Master is:

22% = $241 million ÷ $1.1 billion (based on trailing 12 months to March 2022).

“Yield” is the income the business has earned over the past year. This therefore means that for every C$1 of investment by its shareholder, the company generates a profit of C$0.22.

What does ROE have to do with earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.

Spin Master Profit Growth and 22% ROE

First of all, we love that Spin Master has an impressive ROE. But before we got too excited, we checked the industry average and were disappointed to see that the industry ROE was much higher at 28%. Additionally, the steady earnings seen by Spin Master over the past five years does not paint a very bright picture. Keep in mind that the company has a high ROE. It’s just that the industry’s ROE is higher. Therefore, other factors could be behind the steady revenue growth. For example, the company pays a large portion of its profits in the form of dividends or faces competitive pressures.

Then, comparing with the growth in net income for the industry, we found that Spin Master’s revenue appears to be declining at a similar rate to the industry which has been declining at a rate of 0.3% over the course of the same period.

TSX: TOY Prior Earnings Growth May 29, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or ominous. Has the market priced in TOY’s future prospects? You can find out in our latest infographic research report on intrinsic value.

Does Spin Master effectively reinvest its profits?

Spin Master pays no dividends, which means it keeps all of its profits. This leads us to wonder why the company retains so much of its profits and still generates almost no growth? So there could be other explanations for this. For example, the company’s business may deteriorate.

Summary

Overall, we think Spin Master has positive attributes. Still, the weak earnings growth is a bit of a concern, especially since the company has a respectable rate of return and reinvests a huge portion of its earnings. At first glance, there could be other factors, which do not necessarily control the business, that are preventing growth. That being the case, the latest forecasts from industry analysts show that analysts are expecting a huge improvement in the company’s earnings growth rate. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.

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