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Marshalls plc's (LON:MSLH) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

·4 min read

Marshalls (LON:MSLH) has had a great run on the share market with its stock up by a significant 6.5% over the last month. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. In this article, we decided to focus on Marshalls' ROE.


Check out our latest analysis for Marshalls

How Do You Calculate Return On Equity?

The formula for ROE is:


So, based on the above formula, the ROE for Marshalls is:

0.9% = UK£2.6m ÷ UK£288m (Based on the trailing twelve months to December 2020).

The 'return' refers to a company's earnings over the last year. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.01.

What Is The Relationship Between ROE And Earnings Growth?


Marshalls' Earnings Growth And 0.9% ROE

It is quite clear that Marshalls' ROE is rather low. Even compared to the average industry ROE of 5.3%, the company's ROE is quite dismal. For this reason, Marshalls' five year net income decline of 3.5% is not surprising given its lower ROE. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

However, when we compared Marshalls' growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 24% in the same period. This is quite worrisome.



Is Marshalls Making Efficient Use Of Its Profits?

Despite having a normal three-year median payout ratio of 45% (where it is retaining 55% of its profits), Marshalls has seen a decline in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

In addition, Marshalls has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 48%. Still, forecasts suggest that Marshalls' future ROE will rise to 19% even though the the company's payout ratio is not expected to change by much.


Overall, we have mixed feelings about Marshalls. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

