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Argan (NYSE:AGX) has had a great run on the share market with its stock up by a significant 36% over the last month. 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 Argan's ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
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How Is ROE Calculated?
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 Argan is:
24% = US$85m ÷ US$352m (Based on the trailing twelve months to January 2025).
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 $0.24 in profit.
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What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
Argan's Earnings Growth And 24% ROE
Firstly, we acknowledge that Argan has a significantly high ROE. Secondly, even when compared to the industry average of 13% the company's ROE is quite impressive. Under the circumstances, Argan's considerable five year net income growth of 38% was to be expected.
Next, on comparing with the industry net income growth, we found that Argan's growth is quite high when compared to the industry average growth of 13% in the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. What is AGX worth today? The intrinsic value infographic in our free research report helps visualize whether AGX is currently mispriced by the market.