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It is hard to get excited after looking at Alfa Financial Software Holdings' (LON:ALFA) recent performance, when its stock has declined 8.3% over the past month. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Alfa Financial Software Holdings' ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
View our latest analysis for Alfa Financial Software Holdings
How Do You Calculate Return On Equity?
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 Alfa Financial Software Holdings is:
44% = UK£19m ÷ UK£43m (Based on the trailing twelve months to December 2021).
The 'return' is the yearly profit. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.44 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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.
Alfa Financial Software Holdings' Earnings Growth And 44% ROE
First thing first, we like that Alfa Financial Software Holdings has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 8.9% which is quite remarkable. Probably as a result of this, Alfa Financial Software Holdings was able to see a decent net income growth of 5.2% over the last five years.
As a next step, we compared Alfa Financial Software Holdings' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 14% in the same period.
Earnings growth is a huge factor in stock valuation. 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. If you're wondering about Alfa Financial Software Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.