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Arcosa (NYSE:ACA) has had a great run on the share market with its stock up by a significant 10% over the last month. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Arcosa's ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
See our latest analysis for Arcosa
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Arcosa is:
5.3% = US$129m ÷ US$2.4b (Based on the trailing twelve months to September 2024).
The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.05 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.
Arcosa's Earnings Growth And 5.3% ROE
At first glance, Arcosa's ROE doesn't look very promising. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 18% either. Although, we can see that Arcosa saw a modest net income growth of 15% over the past five years. So, the growth in the company's earnings could probably have been caused by other variables. Such as - high earnings retention or an efficient management in place.
As a next step, we compared Arcosa's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 15% in the same period.
Earnings growth is a huge factor in stock valuation. 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 Arcosa fairly valued compared to other companies? These 3 valuation measures might help you decide.