A2B Australia's (ASX:A2B) stock up by 6.7% over the past three months. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to A2B Australia's ROE today.
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.
See our latest analysis for A2B Australia
How To Calculate Return On Equity?
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 A2B Australia is:
24% = AU$27m ÷ AU$114m (Based on the trailing twelve months to June 2023).
The 'return' refers to a company's earnings over the last year. That means that for every A$1 worth of shareholders' equity, the company generated A$0.24 in profit.
What Has ROE Got To Do With 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
A Side By Side comparison of A2B Australia's Earnings Growth And 24% ROE
To begin with, A2B Australia has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 8.2% which is quite remarkable. Needless to say, we are quite surprised to see that A2B Australia's net income shrunk at a rate of 18% over the past five years. So, there might be some other aspects that could explain this. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
As a next step, we compared A2B Australia's performance with the industry and found thatA2B Australia's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 4.8% in the same period, which is a slower than the company.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is A2B Australia fairly valued compared to other companies? These 3 valuation measures might help you decide.