Most readers would already know that Strategic Education (NASDAQ:STRA) stock has increased by a significant 13% over the past three months. However, since it is a company's long-term financial performance that ultimately drives market outcomes, we decided to focus on its weak fundamentals in this article. Specifically, in this article, we decided to study his ROE for Strategic Education.
Return on equity or ROE is an important factor to be considered by a shareholder as it indicates how effectively their capital is being reinvested. In other words, it is a profitability ratio that measures the rate of return on the capital provided by a company's shareholders.
Check out our latest analysis on strategic education.
How do you calculate return on equity?
Return on equity can be calculated using the following formula:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
So, based on the above formula, the ROE for Strategic Education is:
4.2% = USD 70 million ÷ USD 1.7 billion (based on trailing twelve months to December 2023).
“Revenue” is the income a company has earned over the past year. One way he conceptualizes this is that for every dollar of shareholders' equity, the company earned him $0.04 in profit.
What relationship does ROE have with profit growth?
So far, we have learned that ROE measures how efficiently a company is generating its profits. We are then able to evaluate a company's future ability to generate profits based on how much of its profits it chooses to reinvest or “retain.” Assuming all else is equal, companies with both higher return on equity and higher profit retention typically have higher growth rates when compared to companies that don't have the same characteristics.
Strategic Education Revenue Growth and ROE 4.2%
It's clear that Strategic Education's ROE is quite low. Even compared to the industry average ROE of 13%, the company's ROE is quite pathetic. His disappointing ROE therefore explains Strategic Education's very modest net income growth rate of 3.7% over the past five years.
As a next step, we compared Strategic Education's net income growth rate with the industry and were disappointed to find that the company's growth rate was lower than the industry average growth rate of 15% over the same period.
The foundations that give a company value have a lot to do with its revenue growth. The next thing investors need to determine is whether the expected earnings growth is already built into the stock price, or the lack thereof. This can help you decide whether to position the stock for a bright or bleak future. Is the market pricing in STRA's future prospects? Find out in our latest Intrinsic Value infographic research report.
Is strategic education effectively leveraging its benefits?
Strategic Education's very high three-year median payout ratio of 115% suggests that the company is paying out more to shareholders than it earned, which is contributing to the company's low earnings growth. There is no doubt that it is. This represents a risk.
Additionally, Strategic Education has been paying dividends for seven years. This means the company's management is determined to pay dividends even if there is little or no growth in profits. According to existing analyst forecasts, the company's future dividend payout ratio is expected to drop to 45% in the next three years. As a result, the expected decline in Strategic Education's dividend payout ratio explains the company's future ROE over the same period is expected to rise to his 7.4%.
conclusion
Overall, we will be very cautious before making any strategic education decisions. His ROE in particular is very disappointing, not to mention the lack of proper reinvestment in the business. As a result, revenue growth was also very disappointing. That said, the latest analyst forecasts suggest that the company's revenue will continue to grow. Are these analyst forecasts based on broader expectations for the industry, or are they based on the company's fundamentals? Click here to be taken to our analyst 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 using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.