It is easy to overlook Aquila Services Group's (LON:AQSG) given its unimpressive and roughly flat price performance over the past week. However, attentive investors would probably give more consideration to the stock as the company's fundamentals could add more to the story, given how long-term financials are usually what drive market prices. In this article, we decided to focus on Aquila Services Group's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.
See our latest analysis for Aquila Services Group
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Aquila Services Group is:
1.8% = UK£105k ÷ UK£5.7m (Based on the trailing twelve months to September 2020).
The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.02 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. 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. 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.
Aquila Services Group's Earnings Growth And 1.8% ROE
It is quite clear that Aquila Services Group's ROE is rather low. Not just that, even compared to the industry average of 13%, the company's ROE is entirely unremarkable. In spite of this, Aquila Services Group was able to grow its net income considerably, at a rate of 66% in the last five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.
We then compared Aquila Services Group's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 11% 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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Aquila Services Group fairly valued compared to other companies? These 3 valuation measures might help you decide.