In This Article:
It is hard to get excited after looking at AB Dynamics' (LON:ABDP) recent performance, when its stock has declined 6.5% over the past month. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to AB Dynamics' ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
Check out our latest analysis for AB Dynamics
How Is ROE Calculated?
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 AB Dynamics is:
7.4% = UK£9.7m ÷ UK£131m (Based on the trailing twelve months to August 2024).
The 'return' is the income the business earned over the last year. That means that for every £1 worth of shareholders' equity, the company generated £0.07 in profit.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.
AB Dynamics' Earnings Growth And 7.4% ROE
When you first look at it, AB Dynamics' ROE doesn't look that attractive. Next, when compared to the average industry ROE of 27%, the company's ROE leaves us feeling even less enthusiastic. In spite of this, AB Dynamics was able to grow its net income considerably, at a rate of 20% in the last five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.
Next, on comparing AB Dynamics' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 23% over the last few years.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about AB Dynamics''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.