Are Strong Financial Prospects The Force That Is Driving The Momentum In Southern Cross Electrical Engineering Limited’s ASX:SXE) Stock?

Most readers would already be aware that Southern Cross Electrical Engineering’s (ASX:SXE) stock increased significantly by 24% over the past three months. Given the company’s impressive performance, we decided to study its financial indicators more closely as a company’s financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Southern Cross Electrical Engineering’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.

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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 Southern Cross Electrical Engineering is:

15% = AU$32m ÷ AU$205m (Based on the trailing twelve months to June 2025).

The ‘return’ is the profit over the last twelve months. That means that for every A$1 worth of shareholders’ equity, the company generated A$0.15 in profit.

See our latest analysis for Southern Cross Electrical Engineering

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.

At first glance, Southern Cross Electrical Engineering seems to have a decent ROE. Further, the company’s ROE is similar to the industry average of 16%. This certainly adds some context to Southern Cross Electrical Engineering’s exceptional 21% net income growth seen over the past five years. However, there could also be other drivers behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then performed a comparison between Southern Cross Electrical Engineering’s net income growth with the industry, which revealed that the company’s growth is similar to the average industry growth of 21% in the same 5-year period.

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. Doing so will help them establish if the stock’s future looks promising or ominous. What is SXE worth today? The intrinsic value infographic in our free research report helps visualize whether SXE is currently mispriced by the market.

Southern Cross Electrical Engineering’s significant three-year median payout ratio of 68% (where it is retaining only 32% 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.

Additionally, Southern Cross Electrical Engineering has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with 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 61%. Still, forecasts suggest that Southern Cross Electrical Engineering’s future ROE will rise to 19% even though the the company’s payout ratio is not expected to change by much.

In total, we are pretty happy with Southern Cross Electrical Engineering’s performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that’s not too bad. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.