Does his finances have a role to play in Spin Master Corp’s recent stock spike? (TSE:TOY)?

Shares of Spin Master (TSE:TOY) are up 11% over the past month. Since stock prices are usually aligned with a company’s financial performance over the long term, we decided to take a closer look at its financial indicators to see if they had a role to play in the recent price movement. . In particular, we’ll be paying close attention to Spin Master’s ROE today.

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In simple terms, it is used to assess the profitability of a company in relation to its equity.

Check out our latest review for Spin Master

How to calculate return on equity?

Return on equity 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:

17% = $172m ÷ $1.0bn (based on trailing 12 months to September 2021).

“Yield” refers to a company’s earnings over the past year. One way to conceptualize this is that for every Canadian dollar of share capital it has, the company has made a profit of 0.17 Canadian dollars.

Why is ROE important for earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of ​​the company’s 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.

A side-by-side comparison of Spin Master’s earnings growth and 17% ROE

At first glance, Spin Master seems to have a decent ROE. Regardless, the company’s ROE is still well below the industry average of 29%. Needless to say, the 8.7% net income decline rate seen by Spin Master over the past five years is a huge drag. Keep in mind that the company has a high ROE. It’s just that the industry’s ROE is higher. Therefore, the decline in earnings could be the result of other factors. These include poor revenue retention or poor capital allocation.

With industry profits declining at a rate of 8.7% over the same period, we infer that the company and the industry are shrinking at the same rate.

TSX: TOY Prior Earnings Growth February 27, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This will help them determine if the future of the title looks bright or ominous. Is TOY correctly valued? This intrinsic business value infographic has everything you need to know.

Does Spin Master use its profits efficiently?

Spin Master pays no dividends, which means the company keeps all of its profits, which makes us wonder why it keeps its profits if it can’t use them to grow its business. So there could be other explanations for this. For example, the company’s business may deteriorate.

Summary

All in all, we think Spin Master certainly has some positives to consider. However, although the company has a decent ROE and high earnings retention, its earnings growth figure is quite disappointing. This suggests that there could be an external threat to the business, which is hampering 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. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

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.

About Ian Crawford

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