Strategic Education, Inc.'s (NASDAQ:STRA) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

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With its stock down 17% over the past three months, it is easy to disregard Strategic Education (NASDAQ:STRA). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Strategic Education’s ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company’s success at turning shareholder investments into profits.

See our latest analysis for Strategic Education

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for Strategic Education is:

2.3% = US$39m ÷ US$1.7b (Based on the trailing twelve months to September 2021).

The ‘return’ is the income the business earned over the last year. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.02.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

A Side By Side comparison of Strategic Education’s Earnings Growth And 2.3% ROE

It is hard to argue that Strategic Education’s ROE is much good in and of itself. Even when compared to the industry average of 8.7%, the ROE figure is pretty disappointing. In spite of this, Strategic Education was able to grow its net income considerably, at a rate of 26% in the last five years. We believe that there might be other aspects that are positively influencing the company’s earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Strategic Education’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 16%.

past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Strategic Education is trading on a high P/E or a low P/E, relative to its industry.

Is Strategic Education Using Its Retained Earnings Effectively?

Strategic Education’s significant three-year median payout ratio of 56% (where it is retaining only 44% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.

Besides, Strategic Education has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts’ estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 51%. Regardless, the future ROE for Strategic Education is predicted to rise to 7.3% despite there being not much change expected in its payout ratio.

Summary

In total, it does look like Strategic Education has some positive aspects to its business. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. Having said that, looking at the current analyst estimates, we found that the company’s earnings are expected to gain momentum. 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.