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AlzChem Group's (ETR:ACT) stock is up by a considerable 26% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study AlzChem Group's 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for AlzChem Group
How Is ROE Calculated?
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 AlzChem Group is:
25% = €47m ÷ €183m (Based on the trailing twelve months to June 2024).
The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.25 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. 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.
AlzChem Group's Earnings Growth And 25% ROE
First thing first, we like that AlzChem Group has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 8.8% also doesn't go unnoticed by us. Probably as a result of this, AlzChem Group was able to see a decent net income growth of 17% over the last five years.
We then performed a comparison between AlzChem Group's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 20% in the same 5-year 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. This then helps them determine if the stock is placed for a bright or bleak future. Is AlzChem Group fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is AlzChem Group Efficiently Re-investing Its Profits?
AlzChem Group has a three-year median payout ratio of 35%, which implies that it retains the remaining 65% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.