Declining Stock and Solid Fundamentals: Is The Market Wrong About Clicks Group Limited (JSE:CLS)?

It is hard to get excited after looking at Clicks Group's (JSE:CLS) recent performance, when its stock has declined 5.3% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Clicks Group'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

How Is ROE Calculated?

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 Clicks Group is:

47% = R3.2b ÷ R6.9b (Based on the trailing twelve months to August 2025).

The 'return' is the income the business earned over the last year. So, this means that for every ZAR1 of its shareholder's investments, the company generates a profit of ZAR0.47.

View our latest analysis for Clicks Group

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Clicks Group's Earnings Growth And 47% ROE

First thing first, we like that Clicks Group has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 23% which is quite remarkable. Probably as a result of this, Clicks Group was able to see a decent net income growth of 10% over the last five years.

As a next step, we compared Clicks Group's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 11% in the same period.

Earnings growth is a huge factor in stock valuation. 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. Is Clicks Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Clicks Group Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 64% (or a retention ratio of 36%) for Clicks Group suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Clicks 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 over the next three years is expected to be approximately 65%. Accordingly, forecasts suggest that Clicks Group's future ROE will be 44% which is again, similar to the current ROE.

Summary

Overall, we are quite pleased with Clicks Group's performance. 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. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.