Is Weakness In Air Products and Chemicals, Inc. (NYSE:APD) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

editorial-team@simplywallst.com (Simply Wall St)

Sun, Apr 6, 2025, 6:28 AM 4 min read

It is hard to get excited after looking at Air Products and Chemicals' (NYSE:APD) recent performance, when its stock has declined 17% over the past month. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Air Products and Chemicals' ROE in this article.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

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How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Air Products and Chemicals is:

21% = US$3.9b ÷ US$19b (Based on the trailing twelve months to December 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 $0.21 in profit.

View our latest analysis for Air Products and Chemicals

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

A Side By Side comparison of Air Products and Chemicals' Earnings Growth And 21% ROE

At first glance, Air Products and Chemicals seems to have a decent ROE. Especially when compared to the industry average of 9.9% the company's ROE looks pretty impressive. Probably as a result of this, Air Products and Chemicals was able to see a decent growth of 12% over the last five years.

Next, on comparing with the industry net income growth, we found that Air Products and Chemicals' growth is quite high when compared to the industry average growth of 9.3% in the same period, which is great to see.

past-earnings-growth — NYSE:APD Past Earnings Growth April 6th 2025

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is APD worth today? The intrinsic value infographic in our free research report helps visualize whether APD is currently mispriced by the market.

Is Air Products and Chemicals Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 63% (or a retention ratio of 37%) for Air Products and Chemicals suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Air Products and Chemicals is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 49% over the next three years. Regardless, the ROE is not expected to change much for the company despite the lower expected payout ratio.

Conclusion

Overall, we are quite pleased with Air Products and Chemicals' performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.