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Alfa Financial Software Holdings (LON:ALFA) has had a great run on the share market with its stock up by a significant 23% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Alfa Financial Software Holdings' ROE.
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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for Alfa Financial Software Holdings
How To 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:
50% = UK£22m ÷ UK£44m (Based on the trailing twelve months to June 2024).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.50 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.
Alfa Financial Software Holdings' Earnings Growth And 50% ROE
To begin with, Alfa Financial Software Holdings has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 10.0% which is quite remarkable. This likely paved the way for the modest 13% net income growth seen by Alfa Financial Software Holdings over the past five years.
Next, on comparing Alfa Financial Software Holdings' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 14% over the last few years.
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. This then helps them determine if the stock is placed for a bright or bleak future. 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.