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With its stock down 11% over the past month, it is easy to disregard AHT Syngas Technology (FRA:3SQ1). 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. Particularly, we will be paying attention to AHT Syngas Technology's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for AHT Syngas Technology
How To Calculate Return On Equity?
ROE 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 AHT Syngas Technology is:
18% = €722k ÷ €4.1m (Based on the trailing twelve months to December 2023).
The 'return' refers to a company's earnings over the last year. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.18.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
AHT Syngas Technology's Earnings Growth And 18% ROE
To start with, AHT Syngas Technology's ROE looks acceptable. On comparing with the average industry ROE of 14% the company's ROE looks pretty remarkable. This probably laid the ground for AHT Syngas Technology's moderate 5.8% net income growth seen over the past five years.
As a next step, we compared AHT Syngas Technology's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 15% in the same period.
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). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about AHT Syngas Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.