Kelsian Group Limited (ASX:KLS) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

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19-05-2025

Most readers would already be aware that Kelsian Group's (ASX:KLS) stock increased significantly by 27% over the past month. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Particularly, we will be paying attention to Kelsian Group's ROE today.
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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.
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The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Kelsian Group is:
5.2% = AU$50m ÷ AU$958m (Based on the trailing twelve months to December 2024).
The 'return' is the income the business earned over the last year. That means that for every A$1 worth of shareholders' equity, the company generated A$0.05 in profit.
See our latest analysis for Kelsian Group
So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
On the face of it, Kelsian Group's ROE is not much to talk about. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 9.1% either. However, we we're pleasantly surprised to see that Kelsian Group grew its net income at a significant rate of 29% in the last five years. So, 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 Kelsian Group'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 22%.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Kelsian Group is trading on a high P/E or a low P/E, relative to its industry.
Kelsian Group has a significant three-year median payout ratio of 97%, meaning the company only retains 3.0% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.
Moreover, Kelsian Group is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 68% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 7.7%, over the same period.
In total, we're a bit ambivalent about Kelsian Group's performance. Although the company has shown a pretty impressive growth in earnings, yet the low ROE and the low rate of reinvestment makes us skeptical about the continuity of that growth, especially when or if the business comes to face any threats. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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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