Could The Market Be Wrong About WSP Global Inc. (TSE:WSP) Given Its Attractive Financial Prospects?

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With its stock down 16% over the past three months, it is easy to disregard WSP Global (TSE:WSP). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on WSP Global’s ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

Check out our latest analysis for WSP Global

How Is ROE Calculated?

Return on equity can be calculated by using the formula:

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

So, based on the above formula, the ROE for WSP Global is:

10% = CA$474m ÷ CA$4.7b (Based on the trailing twelve months to December 2021).

The ‘return’ is the yearly profit. That means that for every CA$1 worth of shareholders’ equity, the company generated CA$0.10 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.

WSP Global’s Earnings Growth And 10% ROE

To begin with, WSP Global seems to have a respectable ROE. Even when compared to the industry average of 10% the company’s ROE looks quite decent. This probably goes some way in explaining WSP Global’s moderate 14% growth over the past five years amongst other factors.

We then performed a comparison between WSP Global’s net income growth with the industry, which revealed that the company’s growth is similar to the average industry growth of 14% in the same period.

past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is WSP worth today? The intrinsic value infographic in our free research report helps visualize whether WSP is currently mispriced by the market.

Is WSP Global Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 55% (or a retention ratio of 45%) for WSP Global suggests that the company’s growth wasn’t really hampered despite it returning most of its income to its shareholders.

Besides, WSP Global has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Existing analyst estimates suggest that the company’s future payout ratio is expected to drop to 20% over the next three years. The fact that the company’s ROE is expected to rise to 16% over the same period is explained by the drop in the payout ratio.

Summary

On the whole, we feel that WSP Global’s performance has been quite good. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. We also studied the latest analyst forecasts and found that the company’s earnings growth is expected be similar to its current growth rate. 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.