It is hard to get excited after looking at Southern Cross Media Group's (ASX:SXL) recent performance, when its stock has declined 18% over the past three months. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Specifically, we decided to study Southern Cross Media Group's ROE in this article.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How To Calculate Return On Equity?
ROE 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 Southern Cross Media Group is:
3.0% = AU$6.4m ÷ AU$212m (Based on the trailing twelve months to June 2025).
The 'return' is the amount earned after tax over the last twelve months. That means that for every A$1 worth of shareholders' equity, the company generated A$0.03 in profit.
Check out our latest analysis for Southern Cross Media Group
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
Southern Cross Media Group's Earnings Growth And 3.0% ROE
As you can see, Southern Cross Media Group's ROE looks pretty weak. Even compared to the average industry ROE of 4.7%, the company's ROE is quite dismal. Therefore, it might not be wrong to say that the five year net income decline of 48% seen by Southern Cross Media Group was possibly a result of it having a lower ROE. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. Such as - low earnings retention or poor allocation of capital.
So, as a next step, we compared Southern Cross Media Group's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 38% over the last few years.
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. If you're wondering about Southern Cross Media Group's's valuation, check out this gauge of its price-to-earnings ratio , as compared to its industry.
Is Southern Cross Media Group Using Its Retained Earnings Effectively?
With a LTM (or last twelve month) payout ratio as high as 150%,Southern Cross Media Group's shrinking earnings don't come as a surprise as the company is paying a dividend which is beyond its means. Paying a dividend beyond their means is usually not viable over the long term. To know the 2 risks we have identified for Southern Cross Media Group visit our risks dashboard for free.
Additionally, Southern Cross Media Group has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 36% over the next three years. As a result, the expected drop in Southern Cross Media Group's payout ratio explains the anticipated rise in the company's future ROE to 16%, over the same period.
Summary
In total, we would have a hard think before deciding on any investment action concerning Southern Cross Media Group. The low ROE, combined with the fact that the company is paying out almost if not all, of its profits as dividends, has resulted in the lack or absence of growth in its earnings. 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 latest analysts predictions for the company, check out this visualization of analyst forecasts 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.
