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Could The Market Be Wrong About Auto Trader Group plc (LON:AUTO) Given Its Attractive Financial Prospects?

Simply Wall St · 2d ago

It is hard to get excited after looking at Auto Trader Group's (LON:AUTO) recent performance, when its stock has declined 24% over the past three months. 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 Auto Trader Group's ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

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How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Auto Trader Group is:

52% = UK£294m ÷ UK£564m (Based on the trailing twelve months to September 2025).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.52 in profit.

Check out our latest analysis for Auto Trader Group

Why Is ROE Important For 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 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.

A Side By Side comparison of Auto Trader Group's Earnings Growth And 52% ROE

First thing first, we like that Auto Trader Group has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 36% which is quite remarkable. This probably laid the groundwork for Auto Trader Group's moderate 13% net income growth seen over the past five years.

Next, on comparing Auto Trader Group's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 13% over the last few years.

past-earnings-growth
LSE:AUTO Past Earnings Growth December 10th 2025

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for AUTO? You can find out in our latest intrinsic value infographic research report.

Is Auto Trader Group Making Efficient Use Of Its Profits?

With a three-year median payout ratio of 33% (implying that the company retains 67% of its profits), it seems that Auto Trader Group is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Besides, Auto Trader Group has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 33%. As a result, Auto Trader Group's ROE is not expected to change by much either, which we inferred from the analyst estimate of 55% for future ROE.

Conclusion

On the whole, we feel that Auto Trader Group's performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.