ALS (ASX:ALQ) had a tough quarter with its share price down 7.0%. However, a closer look at its healthy financials might make you reconsider. Since fundamentals usually drive long-term market results, the company is worth considering. In this article, we decided to focus on the ROE of ALS.
Return on equity, or ROE, is a key measure used to assess how efficiently a company’s management is using the company’s capital. In short, ROE shows the profit generated by each dollar relative to the investments of its shareholders.
Check out our latest analysis on ALS
How to calculate return on equity?
The equity return type is:
Return on Equity = Net Profit (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for ALS is:
17% = AU$192m ÷ AU$1.1bn (Based on the next twelve months to March 2022).
“Return” is the income earned by the business in the last year. Another way to think about this is that for every A$1 worth of equity, the company was able to earn A$0.17 in profit.
What is the relationship between ROE and earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. Now we need to assess how much earnings the company is reinvesting or ‘keeping’ for future growth, which then gives us an idea of the company’s growth potential. Assuming all else remains constant, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that do not necessarily carry these characteristics.
ALS and ROE earnings growth of 17%.
To begin with, ALS appears to have a respectable ROE. Especially compared to the industry average of 13%, the company’s ROE looks pretty impressive. Probably as a result of this, ALS has been able to see a decent 15% growth over the last five years.
We then compared ALS’ net income growth to the industry, which revealed that the company’s growth is similar to the industry’s average growth of 12% over the same period.
Earnings growth is an important metric to consider when valuing a stock. What investors must then determine is whether the expected earnings growth, or lack thereof, is already built into the stock price. This then helps them determine whether the stock is positioned for a bright or bleak future. What is ALQ worth today? The intrinsic value infographic in our free research report helps visualize whether ALQ is currently being mispriced by the market.
Is ALS effectively reinvesting its earnings?
ALS has a significant three-year average payout ratio of 81%, meaning it has only 19% left to reinvest in its business. This means that the company has been able to achieve decent earnings growth despite returning most of its earnings to shareholders.
Besides, ALS has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. The latest figures from our analysts show that the company’s forward earnings ratio is expected to fall to 59% over the next three years. Accordingly, the expected decline in the payout ratio explains the expected increase in the company’s ROE to 23% over the same period.
Overall, we are very pleased with the performance of the ALS. We are particularly impressed by the significant growth in earnings that the company recorded, which was likely supported by its high ROE. While the company pays out most of its earnings as dividends, it was able to grow earnings despite this, so that’s probably a good sign. The latest forecasts from industry analysts indicate that the company is expected to maintain its current growth rate. To learn more about the latest analyst forecasts for the company, take a look at this visualization of analyst forecasts for the company.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your goals or financial situation. Our goal is to provide you with long-term focused analysis based on fundamentals. Please note that our analysis may not take into account the latest company announcements that are price sensitive or quality material. Simply Wall St has no position in any of the listed stocks.
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