Most readers would already be aware that Allgeier’s (ETR:AEIN) stock increased significantly by 6.4% over the past week. Given that stock prices are usually aligned with a company’s financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Allgeier’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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
See our latest analysis for Allgeier
How Do You 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 Allgeier is:
8.0% = €15m ÷ €182m (Based on the trailing twelve months to September 2023).
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 €0.08 in profit.
What Has ROE Got To Do With 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.
Allgeier’s Earnings Growth And 8.0% ROE
On the face of it, Allgeier’s ROE is not much to talk about. Next, when compared to the average industry ROE of 11%, the company’s ROE leaves us feeling even less enthusiastic. In spite of this, Allgeier was able to grow its net income considerably, at a rate of 50% in the last five years. We reckon that there could be other factors at play here. Such as – high earnings retention or an efficient management in place.
As a next step, we compared Allgeier’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 17%.
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. If you’re wondering about Allgeier’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Allgeier Making Efficient Use Of Its Profits?
Allgeier’s three-year median payout ratio is a pretty moderate 46%, meaning the company retains 54% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Allgeier is reinvesting its earnings efficiently.
Besides, Allgeier has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to drop to 28% over the next three years. The fact that the company’s ROE is expected to rise to 12% over the same period is explained by the drop in the payout ratio.
In total, it does look like Allgeier has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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.
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